Who doesn’t want to own a private living space? A space that you can proudly call ‘your’ home, because you are tired of keeping your eyes on the calendar as you approach the day of paying your home-rent. Buying a house is one of the biggest and most critical financial decisions that you will make in your lives. So take it seriously.
Let’s reiterate one of the basic fundamentals of savings – ‘Don’t spend more than you earn’. Don’t be a compulsive buyer. So right before you think of buying a house, you need to mark an important checklist of five:
- How much do you earn?
- Your investment lookout?
- Your surplus funds/savings?
- Your expenses and/or investment priorities?
- Your credit score?
After you attain answers to the above checklist, you are a step closer in the direction of making a sound decision of buying a home. However, remember this is your personal checklist. The economics of home ownership from the market standpoint contributes a major portion in this decision making process. You don’t just buy a home to live. It’s important to consider it an investment opportunity that must be leveraged to a vast degree in the future.
So let’s chart out some distinguished pros and cons of buying or renting a house.
Table 1. Comparison of Buying vs. Renting Across Key Criteria
Nil to minimum
Minimal benefits linked to HRA
Depends on owner
No flexibility after purchase
Flexible location choice and relocation
Long Term Benefits
Building an asset/Investment opportunity
Systematic depreciation due to weather changes etc.
No worries regarding depreciation
Minimal and only in case of floating rate home loans
|Annual increase in rent usually around 10%|
So once you are through with assessing the advantages and disadvantages, take a look into your local housing market for the current rates of buying and renting. Check with a credible realtor and/or online to get an estimate of rental costs and purchase costs in your desired area. Inquire about neighborhoods and other vicinities you might want to consider as an alternative. Check with reliable home loan lenders in the market. Most of them are happy to work with first-time buyers to explain the mortgage process so you know how much loan you are eligible for. But be cautious to consider all your expenses and how much you want to invest in your house. You need to ensure your readiness to make a long-term commitment.
So if you have a house on rent and are worried of it rising annually, you need to take a closer look at your savings, if any, or look out for low mortgage interest rates that make your purchase more affordable. However, do consider the pros and cons of both buying and renting. There are no thumb rules except that you need to be emotionally and financially prepared to commit to home ownership. Essentially, as long as you can afford your housing payments at ease, buying a home will always be a brilliant financial move.
Read more at Handy Guide for Home Buyers on Down Payment
Let’s crunch some numbers:
The Rent Side:
Monthly Rent = Rs 20,000; Annual Rent Increase rate = 10%
Security Deposit = Rs. 20,000 i.e. one months’ rent (An ideal scenario)
Brokerage Cost = Rs. 10,000
Gross Annual Household Income = Rs. 9.5 lakhs i.e. Marginal tax rate of 20%
Interest lost on Security deposit = 7% per annum
The Buy Side:
Total price of the flat= Rs 66 lakhs.
Down payment = 10%
Total home loan amount = Rs. 60 lakhs.
EMI = Rs. 56,276 for a period of 240 months if you are taking a home loan at 9.5%.
Table2*. Following is a comparison of the Savings of Buy vs. Rent over a 20 year period using the formula:
Annual Savings = (Net Amount received by purchasing today, staying and then selling after ‘X’ no. of years – Total amount spent by renting for ‘X’ no. of years)/No. of Years (X)
Cumulative net loss of Rs. 5.39 lakhs
Rs 21,000 in monthly rent is lot less than the EMI of Rs. 56,276
Cumulative net loss of Rs. 5.64 lakhs
Rs 29,282 in rent is still less than the EMI of Rs. 56,276 per month
Cumulative net gains of Rs. 7.65 lakhs
Rs. 47,158 in monthly rent is still less than the EMI of Rs. 56,276
Cumulative net gains of Rs. 44.62 lakhs
EMI of Rs. 56,276 per month is less than Rs. 75,949 in monthly rent
Cumulative net gains of Rs. 1.17 crores
EMI of Rs. 56,276 per month is less than the projected Rs. 1.22 lakhs in monthly rent
*The values are indicative. Real world scenarios may be impacted by multiple other factors.
As shown in our example, buying the flat is definitely the correct option provided you intend to stay there for 10 years or more.