Should I buy a house with cash or a mortgage?

Q I am due to inherit a large sum of money in the near future. I am also
looking to purchase a house. Should I use the capital to buy the house or invest the money and apply for interest-only mortgage? Is this a sensible way to purchase a home and if so what are the potential pitfalls?

Would returns on the investment minus tax enable me to purchase a similar
house to one I could purchase with the capital?

KW

A Using an interest-only mortgage is an expensive of financing a house purchase. Because the amount of capital borrowed does not decline, you have to pay interest on the whole sum over the repayment period. It works out much cheaper to pay off some capital, as well as interest, since this will greatly reduce the total amount to repay.

However many people prefer the more expensive route of an interest-only loan because they may not be able, or wish, to make the extra capital payments, particularly in the early years. They were encouraged in the past too by forecasts that an investment in an endowment policy, using some of the money that would have been used to repay capital, would generate a sufficient sum (and possibly a bonus) to cover repayment of the interest-only loan when it became due.

We now know that advice was severely flawed and often motivated by a desire to generate commission. Basically it costs more to borrow money than you are likely to achieve on investments, especially when tax is taken into consideration. I would, therefore, suggest using your inheritance to fund the purchase of your house.