More Real Estate Investors Choosing Cash Purchase over Mortgage

The 9% average increase in property prices from the beginning of 2013 to the start of 2014 is perhaps the best news that real estate investors have got in over five years. The market is experiencing steady growth once again and this opens up more opportunities for profiting. While in the past the use of mortgage loans was the preferred finance option, now more and more investors choose to use cash for financing their property purchases.

In February 2014, some 30.1% of all property purchase deals involved no mortgage financing. The share of cash only purchases made by real estate investors was 74.5%. This is a clear indicator that many of the investors buying a property now prefer to use the cash which they have accumulated over the past years. This trend can be easily explained with the fact that the property market was stagnant for the past five years and investors had no choice but to wait for its recovery. The revival which started last year has now turned into steady growth and investors are looking to capitalize on it.

The free extra cash available may not be the only reason why many investors choose to use it over mortgage loans. The stricter mortgage rules introduced in January 2014 have also had an impact on property investors. The current maximum debt-to-income ratio requirement is 43% and this is lower than what most lenders required in the past. The FHA loans which have traditionally been among the most affordable have got a considerable total cost increase due to the increase in their insurance premium. The maximum limits on these loans have also gone down and this is a major restriction, especially for investors engaging in property flipping.

It is highly unlikely for the number of investors using cash to finance property purchases to grow further in the future. Even though mortgages experience a slight decrease in popularity now, they will certainly keep their place as the top financing option.

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