Take a Home Loan or Keep Paying Rent?
There are certain factors which require your sincere consideration before making this decision. Factors such as: Your work experience, your salary, your eligibility for a home loan. Let’s face it you cannot take a home loan as soon as you start earning. If you are new at your job, your career is at its early phase, then renting is the better option. It usually takes a few years (5-10 years) for buying to become a better deal than renting. That’s because there are some big up-front costs when buying, and your monthly payments from buying are generally higher.
Let’ s consider, you are looking to buy a Home in Delhi, Mayur Vihar region at current average land rate of Rs. 6000 per Sq ft. It will cost you Rs. 60 lacs to buy a decent house of 1000 sq ft area. Banks usually sanction only 80-85% of the property value as home loan, which means you have to pay 20% of the value of property upright as a one time payment i.e. you’ll need to have a corpus of atleast 12 lacs before even thinking about going for a home loan.
After you have build a big enough corpus, you still need to be eligible for a loan as big as 48 lacs. The monthly EMI for a loan of Rs. 48 lacs taken at the Current Interest rates of 9.9% for a tenure of 20 years comes out to be Rs. 46,000/. You should know that Banks restrict your EMI to 40-45% of your monthly income. Hence, in order to be eligible for a Home loan of that amount you need a minimum salary of slightly above Rs. 1 Lac. In order to increase eligibility, you can add a co-applicant in your application, Eg your spouse or parent and then your combined salary will be considered in determining eligibility. On the other hand, rent for a similar property will be around Rs. 20,000 which is more manageable.
Some other Circumstances where it is probably better to rent than to buy a home are:
✓ Your rent is lower than average – and you expect it to stay that way.
✓ You plan on moving in a few years – and you’ll not be able to stay much in that house
✓ You can get better-than-average returns from whatever you’re investing your cash into.
✓ You plan on buying a much larger house than the one you are renting, then plan accordingly.
All the above are very ideal conditions. In Truth, rent increases continuously and no investment has such a consistent rate of return over such a long period of time as property.
If you have assembled enough savings, found the right property and have adequate earnings, it’s always better to buy a home than to rent. WHY??
- House is still a beneficial investment choice
The payments towards home loan may be mathematically more than the rent but, it is actually not. Those payments are building equity in your home — you’re “keeping” some of what you’re paying. Also, while you’re making your payments, your home generally appreciates in value.
See the effect appreciation has on the value of property in table below:
|
Rate of Appreciation |
Value of Property after 20 years |
| 8% | 2.80 Crores |
| 10% | 4.03 Crores |
| 12% |
|
After some number of years the equity you’ve paid into your home plus the appreciation will usually overcome the extra money you had to pay to get into the home. Even after accounting for inflation, if property is appreciating at a rate better than inflation, value of property will outweigh all the costs.
This is very clearly demonstrated by the calculations below:
Consider the same property worth Rs. 60 lacs. We advise you to try and make a downpayment of 30% and only take 70% of the amount as loan.
Loan amount Taken : 42 Lacs at 9.9% per annum for 20 years
Down Payment: 18 Lacs
Monthly EMI payment: Rs. 40,250
Total amount paid towards Home during 20 years: Rs. 1.146 Crores
We have calculated the Inflated value of all payments after 20 years in order to make a fair comparison. In India, the average WPI rate of inflation from 1959 to 2011 has been 6.80.
In our calculations, we consider a rate of inflation of 7%.
|
Inflated Value of all Home loan payments (in INR) |
|
| Down Payment | 69.65 lacs |
| Year 1 EMI | 18.34 lacs |
| Year 2 EMI | 17.14 lacs |
| Year 3 EMI | 13.65 lacs |
| Year 4 EMI | 12.88 lacs |
| Year 5 EMI | 12.15 lacs |
| Year 6 EMI | 11.46 lacs |
| Year 7 EMI | 10.81 lacs |
| Year 8 EMI | 10.20 lacs |
| Year 9 EMI | 9.62 lacs |
| Year 10 EMI | 9.07 lacs |
| Year 11 EMI | 8.56 lacs |
| Year 12 EMI | 8.08 lacs |
| Year 13 EMI | 7.62 lacs |
| Year 14 EMI | 7.19 lacs |
| Year 15 EMI | 6.78 lacs |
| Year 16 EMI | 6.40 lacs |
| Year 17 EMI | 6.04 lacs |
| Year 18 EMI | 5.69 lacs |
| Year 19 EMI | 5.37 lacs |
| Year 20 EMI | 5.07 lacs |
| Total Cost of your loan considering Inflation | 261.8 Lakhs or 2.618 Crores |
It can be seen that the value of the repayments at 7% inflation comes out to be 2.618 crores.
But, if your property appreciates at an average rate of 10% for 20 years, it will be worth 4.03 crores.
Your earnings on this investment would be around Rs. 1.39 crores for the whole period after accounting for inflation.
- Buying Home is building an asset
Even if your home does not appreciate as much in value, it’s still yours. Even if it barely outpaces inflation, at the end of the day, you own it, and that’s worth something. If you choose to continue paying rent, you give money to someone else and you own nothing. So, there is an argument that if you take home loan, one day you’ll pay it off and you’ll have an asset to show for your efforts.
Ultimately, home loan is an extremely personal choice that you should weigh considering your circumstances. Ownership of home is a dream for many people, but it is not a decision to be taken emotionally. It should be carefully taken after examining all the factors and understanding where you are financially.
We hope the above analysis and explanations will guide you in making the right decision.
