How to Buy a Property Without a Home Loan

With interest rates back on the rise and bank approvals becoming harder and hard to come by, buying a home without a home loan can sound too good to be true. However, if you are willing to work around and against the traditional idea of the home buying process you can be living in your dream home mortgage free.

There are two main ways you can buy a property without a home loan:

1. Buy with cash.

2. Rent to buy.

Both of these methods will be outlined below and you’ll be able to see that when you change your thinking about the expected conventions for moving through life, you’ll find that there is often a better way to do things.

Buy Your Property With Cash

Even if you haven’t started to look very closely at the property market in your area, you’ll know that several hundred thousand dollars is a huge savings goal to reach to pay for your home in cash. That is why there are a few steps you’ll need to follow before you are able to pay for a property with cash.

1 – Save for your first home

Saving as much as you can each month to afford to buy your first home will get you into good savings habits for the years to come when you have to live a little frugally to be able to eventually live mortgage free. If you want to buy your first home right now, just wait and look at your circumstances. For your plan to work and for you to be able to live mortgage free, you need to be able to save well and consistently.

In most cases it will be cheaper to rent than to pay off a mortgage, so don’t rush out and buy your dream home and mortgage yourself to the hilt. Instead, rent somewhere affordable and save the difference between your rent and what you were going to pay on a mortgage. Even if you were to rent a small house, you can usually pay around $800 a month less than if you had bought it. even if rents are similar to the cost of a mortgage in your area, look for a smaller place to rent while you build your savings.

Of course, if you were to save $800 a month it would still take you around 15 years to buy a typical home. Luckily in this example you don’t have to wait that long. If you spend a few years saving as much as you can, maybe even working a part time job or starting a small home business to bring in extra cash, you can then buy the cheapest house in an improving area.

2 – Buy a cheaper house

Most people will go to a bank and ask ‘how much can we borrow’. They will then set out to find their dream house within the absolute top amount the bank will lend them. However, if you want to eventually be free from the bank, you need to go in and borrow as little as possible for your first home. Remember that you have saved a healthy deposit so you can reduce your home loan by a big chunk first off.

You can still base your purchase on the amount your bank is willing to lend you – for example if the bank tells you that you are eligible for a $2,000 a month mortgage, look for a property you can repay for $1,000 a month or less. You can then search for a home which is liveable, but which needs a bit of love, and is in an area which is turning over. You’ll then have $1,000 or more in your budget to spend on improvements to add value to your new home. In this way you will still be able to afford your home if you lose your job and you have to work in a supermarket to pay the bills for example, or a home which you can afford on only one income if you or your partner is unable to work. This means that even in an emergency you won’t have to sell up and start back at the beginning, and you won’t be tempted to live on your credit cards and rack up new debts.

At the moment you will have a less impressive home than most of your friends, but you will also have less stress in your life. Plus, while your neighbourhood isn’t at its most appealing, you will get the best value from your home by buying in an up and coming area. That means when you choose your first affordable house, work with a real estate agent to find neighbourhoods which are turning over, look for areas where people are repainting their homes, doing extensions or fixing their gardens.

3 – Fix up your house

Now that you’ve done your research and found a property in an area which will go up in value, you have to make sure your property goes up in value too. This is where it is important that you’ve bought a property which only needs cosmetic work, as structural issues can become much more expensive than you budgeted for, and eat into any value you can add.

Start by increasing the property’ curb appeal by planting bushes in the front yard, taking care of the lawn so it looks healthy and adding flowers for a fresh scent which will attract visitors and help buyers imagine themselves in the home. Do the same in the backyard, making changes which will enhance the appeal without too much financial outlay. For example, if the back fence is looking a bit shabby, repaint it and plant fast growing hedges in front of it and this will be much cheaper than replacing the whole fence.

Inside the house repaint in light colours as this will make the spaces look bigger and brighter, and will help make the appeal of the property more neutral. Flooring is another important part of a home’s image and if the wooden floorboards are looking scuffed, sand them back and re-stain them. If the carpet is worn and stained, replace it with a laminate which looks like wooden floorboards but is a fraction of the price. These laminate floors are easy to put together yourself as they either lock together as a floating floor, or glue together simply.

Always make sure that the enhancements you make to the house fit with the style of the property. For example if you’re renovating a Victorian style house, don’t add too many modern fixtures and fittings. Also do your research with the help of a local real estate agent to make sure you don’t spend too much money and over capitalise.

4 – Sell the property for the equity

Equity is the difference between what you owe and what the property is worth. Since you bought the property at a low price and have done some important improvements, you will have accumulated enough equity to upgrade to a bigger home in a better suburb, and pay for that new property with cash.

You know the effort you have put into the home, so make sure you choose an agent who will be able to secure you the right sale price. Some agents will tell you they can get an exorbitant amount for your property just to get you to sign with them, so it important that you research recent sales in the area to get an idea of what your property is really worth, so you can choose a reliable and responsible agent to help you with the sale.

5 – Buy your next property without a home loan

Now you can find an area where you can buy an ideal home for the amount of equity you will get from the sale of your first property. You may have to live a little further from town or have a house which is a little smaller than your friends, but you’ll make up for that with the suburban or country lifestyle and of course all the money you will save by not paying a mortgage and interest charges each and every month for the next 30 years.

Rent to Buy

If you don’t have the time or the inclination to work your way through several properties to build equity and buy a home with cash, avoid using a home loan to buy a property by taking part in a rent to buy scheme.

If you are renting it can be hard to imagine breaking free of the rent cycle, but when you rent to buy your rent is working for you, not your landlord. Each month your rent goes towards reducing the price you will have to pay to buy the property in the future. You will need to pay a small initial amount, but you won’t need to have saved up anything close to the standard home loan deposit amount. Instead, to set up a rent to buy agreement you usually only have to pay around 2% of the property price, plus this amount is deducted from the final purchase price of the property too.

A rent to buy agreement usually operates for three to five years, but if you start a rent to buy agreement and then decide you don’t want to buy the home in the future, you are not locked in. Unlike a home loan which will charge you high exit fees and break costs if you decide you don’t want it anymore.

As you pay your rent and reduce the final purchase price of your home, you are reducing the ultimate home loan amount yet you don’t have to worry about interest rate movements, loan fees or any of the approvals process during the rent to buy period. Plus, since you are still only paying rent, which is cheaper than a regular home loan repayment, you can save the difference and taken an even bigger chunk off of the mortgage when it is turned over to you. You’ll then be streets ahead with your repayments and can be mortgage free in no time.

Other benefits of choosing to rent to buy include:

* It doesn’t matter if you have a bad credit rating and can’t get a loan.

* Once you move into the property you are the owner.

* Any equity you build up in the home through value adding is yours when you buy the property.

* Your rent is deducted from the price of the property and isn’t being wasted.

* You can buy a property over time, in a way which works for you.

Alban has been writing about bad credit personal loans for the last 2 years. Alban has also contributed several articles on international personal finance blogs. Image by nikcname