Pay rent or pay EMI, that¡¯s the dilemma we¡¯ll solve for you today, using only some basic school level maths. The decision to live on rent or buy a home with the help of a home loan, leaves a question mark in most of the young earner¡¯s minds. On one hand there¡¯s the perception of owning a home, and on the other is the flexibility of staying on rent without the worry about the burden of big EMIs. Unfortunately there¡¯s no one size fits all answer here. But depending on what the numbers tell us, you can always pick what suits you best, based on your lifestyle and affordability.
Let us assume two? scenarios - One is of a person staying in a big city on rent, and second of owning a home in the said city while paying home loan EMI. Comparing the financial implications of both these scenarios will help you weigh them against each other and thus take an informed decision:
Scenario 1
Monthly rent payable-Rs 25,000
Annual rent payable in first year-Rs 3 lakh
Rental yield-3% (Average rental yield in India is 2-3%)
Cost of the rented property-Rs 1 crore
Assumed annual rental increase-10% p.a.
Total rent paid if stayed there at rent for 15 years-Rs 89.8 lakh?
Scenario 2
Cost of the purchased property-Rs 1 crore
LTV ratio-75%
Downpayment required- Rs 25 lakh
Home Loan Amount-Rs 75 lakh
Assumed annual capital appreciation in property value-5% p.a.
Value of this property after staying for 15 years-2.07 crore
Assumed Home Loan interest rate-7% p.a
Stamp duty charges-6% of amount (for a male buyer in Delhi)=Rs 6 lakh
Property registration charges-1% of amount=Rs 1 lakh
Home Loan tenure-15 years
Total cost of the home loan-Rs 1.21 crore
Expected EMI-Rs 67,412
Besides the down payment, stamp duty, registration charges, and total home loan cost, all of which totals to Rs 1.53 crore, there would likely be additional costs like maintenance charges, property tax, brokerage fee etc which vary.case to case, adding which the amount is likely to turn out to be close to Rs 1.62 crore.
What if you had instead invested the Rs 25 lakh spent on the downpayment?
In case you had rather invested that down payment lumpsum of Rs 25 lakh in equity mutual funds for 15 years, a corpus of around Rs 1.36 crore would have been accumulated, assuming a conservative 12% p.a. Returns.
Now, assuming another sub-scenario wherein you agree to compromise on the type of property vis-a-vis the one for which you are paying Rs 25,000 monthly rent and costs Rs 1 crore if purchased, or you get a good deal for a property elsewhere, you go ahead and take a home loan to purchase that new property.
Property cost- Rs 60 lakh
Stamp duty charges-6% of amount (for a male buyer in Delhi)=Rs 3.6 lakh
Property registration charges-1% of amount=Rs 60,000
LTV ratio-80%
Downpayment required- Rs 12 lakh
Home Loan Amount-Rs 48 lakh
Assumed annual capital appreciation in property value-5% p.a.
Value of this property after staying for 15 years-1.24 crore
Assumed Home Loan interest rate-7% p.a
Home Loan tenure-15 years
Total cost of the home loan-Rs 97 lakh
Expected EMI-Rs 53,930
If you choose to stay in this purchased property for 15 years wherein your total cost would be close to Rs 1.01 crore, assuming a 5% annual appreciation rate, the value of this property would turn out to be close to Rs 1.24 crore.
So what will you do?
In case 1 where you stay on rent, your total cost is expected to be Rs 89.8 lakh for the 15 years, without having ownership of the asset but also capable of giving you a corpus of Rs 1.36 crore if you invest the amount which would have otherwise been spent on downpayment.?
In case 2 where you avail a home loan and own the home, your total cost is expected to be close to somewhere around?Rs 1.6 crore. But along with this higher cost of owning a home, you do avail the benefit of having ownership of this asset whose value appreciates to close to Rs 2.07 crore after 15 years. Similarly, in sub case 2,? your total cost is expected to be close to 97 lakh. But along with this cost of owning a home, you do avail the benefit of having ownership of this asset whose value appreciates to close to Rs 1.24 crore after 15 years.
In purely financial terms, the total expected cost of renting vs buying does involve a significant difference if solely seen from a financial perspective, with the decision to rent being the one likely to save you close to Rs 72 lakh and Rs 10 lakh respectively in case 2 and sub case.?
However, remember that these calculations are based on aforementioned expected and assumed conditions. When you take the decision, ensure to factor in all these parameters before arriving at the choice to rent or buy a house.
Conclusion
-In the present scenario, all time low home loan interest rates, concessional stamp duty charges on offer from various state governments, higher tax benefits available at present, and the dire need of a boom in realty sector¡¯s demand especially due to COVID, certainly makes a strong case for one to own a home with the help of home loan, if financially ready and capable of making the repayments.?
-However, renting has its own share of positives, biggest being flexibility and lower total cost. Thus, the decision certainly rests in the individual¡¯s hands, and varies as per financial conditions, liabilities, work profile and income of the person.
-Broadly speaking, for someone eyeing a short term solution, renting can be the choice until one becomes financially capable enough to adequately contribute down payment as well as repay the home loan EMIs without compromising on other life goals. In the long run, the benefits of owning a home tend to likely outweigh those of renting in multiple ways when factors like higher tax benefits, freedom to stay as long as you want in the house, social status, asset ownership etc are taken into consideration. Although purely on the basis of case scenarios assumed above, renting turns out to involve lower cost than owning a home.?
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