Choosing between getting a home loan to buy a house or just renting one can be really tricky. It's a big choice: do you want to go for a home loan and eventually own your place, or is it better to avoid the big commitment and rent instead?
People use a home loan vs rent calculator to try and figure out what's cheaper month by month, comparing home loan EMI vs rent. But it's not just about what you pay every month. It's also about what feels right for you. Each has its own cost of rent vs mortgage to consider. So let’s break it down into simpler terms to help you make a choice that fits your budget and matches your life's pace.
Suggested read: Home Loan Processing Time
Pros of Buying: Investing in Your Future
Building Equity - A Solid Foundation
A home purchase is not just a place to live; it's an investment in your future. With every mortgage payment, you're building equity—the difference between your home's value and what you owe on your home loan. Over time, this equity can grow substantially, particularly if your home appreciates in value, often at an average rate of 8-10% annually.
Financial Predictability - Home Loan EMI vs Rent
Opting for a home loan brings a degree of financial predictability. Your home loan EMI is a fixed expense that eventually concludes, unlike rent, which is a perpetual outlay without an end date. Homeownership allows you to budget with greater precision, as you're not subjected to the annual cost of rent vs mortgage increases imposed by landlords.
Suggested read: Home Loan Interest Rates in August 2023 of All Banks
Tax Benefits - A Helping Hand
Owning a home can offer significant tax deductions on the interest and principal of your mortgage, reducing your taxable income. The government rewards homeowners with benefits like deductions of up to Rs 2 lakh on interest under Section 24 and on the principal amount under Section 80C.
Emotional Fulfillment - More Than Just Money
There's a profound sense of achievement in buying a home—it's a significant milestone. Homeownership offers a sense of security and the freedom to personalize your space, enriching your quality of life beyond just the financial aspects.
Cons of Buying: The Hidden Costs
The Upfront Investment - A Steeper Start
Acquiring a home comes with considerable upfront expenses: down payments, registration fees, and stamp duty. These costs require significant savings and can be a barrier for many potential homeowners.
Liquidity Concerns - A Long-Term Commitment
Real estate is an illiquid asset. Unlike stocks or bonds, you can't quickly sell a house for cash without potentially affecting its value. Selling a property can be a lengthy process, dependent on market conditions.
Suggested read: How to Find a Bank to Refinance Your Investment Property
Pros of Renting: Flexibility and Freedom
Financial Freedom - Lower Initial Costs
Renting is often more accessible in the short term. The initial costs are significantly less daunting, generally requiring only a security deposit and the first month's rent, which is much less than the lump sum needed for a down payment on a home.
Flexibility - Keeping Options Open
Renting offers unmatched flexibility. You can move at the end of your lease without the hassle of selling a property. This freedom is particularly appealing to those with careers or lifestyles that require the ability to relocate quickly.
Cons of Renting: The Perpetual Tenant
No Asset Building - Renting as an Expense
The primary downside to renting is that your monthly payments do not contribute to building an asset. While homeowners build equity, renters do not have this opportunity, which can make a significant difference in long-term wealth accumulation. Renters also miss out on many of the tax benefits that homeowners enjoy.
Yearly Increases - The Rising Cost of Rent vs Mortgage
Rent typically increases each year, and unlike a fixed-rate mortgage v rent scenario, you may face steeper hikes over time. In contrast, a fixed-rate mortgage remains constant, making long-term financial planning more predictable. Additionally, renters may not have the same flexibility as homeowners when it comes to making changes to the property. This could include adding an extension, changing the layout of the space, or adding an additional room.
A Lifetime Expense - No End in Sight
Unlike a mortgage, which has a definitive endpoint, renting is a lifelong expense. This perpetual cost can add up significantly over the years, with no asset to show for it at the end. Additionally, renters also have to worry about the potential for an increase in rent prices, as landlords may try to increase rents in order to maximize their profits. Renters also have to worry about the potential eviction of their property at any time, as landlords may decide to sell your home to another renter.
The Hassle of Moving - The Instability of Renting
Regular moves can be a significant downside to renting. At the whim of landlords, you may find yourself relocating more often than desired, incurring moving costs and the stress of finding a new home.
Let’s understand the pros and cons of both options with the help of an example:
Option 1: Renting
● Monthly Rent: ₹25,000
● Annual Increase in Rent: 5%
● Duration: 20 years
Over 20 years, the total amount spent on rent, considering a 5% annual increase, would be significantly high. In the first year, you'd pay ₹3,00,000 (₹25,000 x 12). If the rent increases by 5% annually, by the 20th year, your monthly rent would be approximately ₹66,033, and you would pay ₹7,92,396 in that year alone.
Option 2: Buying with a Home Loan
● Home Value: ₹50,00,000
● Down Payment: ₹10,00,000 (20% of home value)
● Home Loan Amount: ₹40,00,000
● Home Loan Interest Rate: 8% per annum
● Tenure: 20 years
Using a home loan EMI calculator, the EMI for this loan amount, interest rate, and tenure would roughly be ₹33,504 per month. Over 20 years, you would pay ₹80,40,960 in total (₹33,504 x 240 months), which includes the principal and the interest.
In 20 years of renting, you have no asset to show, but after 20 years of paying the home loan EMI, you own a property that could appreciate in value. Let's say the property's value appreciates by an average of 3% per year; the ₹50,00,000 home could potentially be worth over ₹90,00,000 in 20 years, not accounting for any fluctuations in the market.
Financial Snapshot After 20 Years:
● Renting: Total Rent Paid: More than ₹90,00,000, with no property ownership.
● Buying: Total EMI Paid: ₹80,40,960, with a property potentially worth ₹90,00,000 or more.
In this scenario, opting for a home loan and buying the property seems financially better in the long term because not only do you stop paying EMIs after 20 years, but you also have a valuable asset that has likely appreciated in value.
Making Your Decision: To Buy or to Rent?
Lifestyle impacts the rent vs home loan decision profoundly. Renting is a great fit if you're not sure where your job might take you or if you like being able to move around easily. It's perfect for people who live in the city and want to keep their options open, or for anyone who's going through changes in life and doesn't want to be tied down to one place just yet. On the other hand, buying a home may benefit those with a fixed family plan, an eye for investment, or a desire to lay down roots and potentially leverage the property for passive income or as a retirement strategy.
Ultimately, the decision to take out a home loan or continue renting is highly personal. Whichever path you choose, make sure it aligns with both your financial situation and your vision for the future.
FAQs about Home Loan vs Renting
In the short term, renting can often be more cost-effective since it requires lower upfront costs and does not tie up a large amount of capital. However, in the long term, owning a home can be more financially beneficial as you build equity and benefit from potential property appreciation.
Renting can affect your long-term financial goals by not contributing to asset accumulation. While it offers flexibility and may help in saving cash in the short term, it doesn't provide the long-term financial growth that comes from owning a property that appreciates over time.
Absolutely. The local real estate market can greatly influence the cost-effectiveness of renting versus buying. If property prices are high and predicted to stay stable or rise, buying might be a good investment. Conversely, if the market is volatile or prices are inflated, renting might be safer until the market stabilizes.
It can be beneficial to rent first, especially if you are new to an area or if you are still saving for a down payment. Renting allows you to understand the locality, its amenities, and whether it suits your lifestyle before making the significant commitment to buying a home.
Buying a home with a loan can enable you to acquire a valuable asset without paying the entire cost upfront. You can also benefit from tax deductions on loan repayments, and in the long run, you could gain from property value appreciation. Additionally, you build equity with each EMI payment.
The better option depends on individual circumstances, such as financial stability, lifestyle preferences, career goals, and market conditions. Buying is generally better for long-term financial growth while renting is more suited for those seeking lower upfront costs and flexibility.
In India, buying a house is often seen as a better option in the long run due to the potential for property appreciation and the cultural value placed on homeownership. However, for those who prioritize mobility or are not ready for the financial commitment, renting can be a better short-term solution.
The salary at which one should buy a house in India varies greatly. A general rule of thumb is that your home loan EMI should not exceed 40% of your monthly take-home salary. Additionally, having a stable income and the ability to afford the down payment and associated costs without compromising on other financial goals is crucial.
Published on 31st October 2023