Buy a home or rent a home?
Renting vs Buying: Having a house in one’s own name in big cities like Mumbai, Delhi, Bengaluru or Pune is everyone’s biggest desire. Often people do not consider it merely a transaction of money, but relate it to their feelings and respect. But in today’s times, when property prices are very high, is it right to pay huge EMIs? Or is it more beneficial to live in a rented house and invest your money in the stock market or mutual funds? To solve this confusion, let us understand the complete details of a flat worth Rs 1 crore, so that you can take the right decision without any loss.
Understand the real cost of a house worth Rs 1 crore
If you decide to buy a 2BHK flat worth Rs 1 crore in a big city, then first of all you will have to pay 20 percent of your savings i.e. Rs 20 lakh as down payment. For the remaining Rs 80 lakh, if you take a home loan for 20 years at 8.5 percent interest rate, then the EMI will be around Rs 69,400 every month. On top of this, Rs 6 to 8 lakh will be spent separately including registration, stamp duty, maintenance and property tax. Now the mathematics is that in 20 years you will have paid only interest of about Rs 86.5 lakh on a loan of Rs 80 lakh. That means a house worth Rs 1 crore will ultimately cost you Rs 1.66 crore.
You can get benefit from rented house
Now let us look at the other side of the coin. The rent for a house worth Rs 1 crore in big cities of India usually ranges from Rs 22,000 to Rs 25,000 per month on an average. If you rent a house for Rs 25,000 instead of buying a house, then the difference between EMI (Rs 69,400) and rent i.e. Rs 44,400 is saved in your pocket every month. Apart from this, Rs 20 lakh as down payment also remains safe with you.
If you invest the remaining Rs 20 lakh of down payment in a mutual fund giving 12% annual return for 20 years, then this amount increases to approximately Rs 1.93 crore. At the same time, by continuously doing SIP of Rs 44,400 saved every month, a fund of Rs 4.43 crore is prepared after 20 years. That means after 20 years you will have a huge amount of Rs 6.36 crore, which is much more than the price of the house.
Know this easy formula before taking it home
A simple way to decide whether you should buy a house or rent a house is the EMI-to-Rent Ratio. To calculate this, the monthly rent of your area is divided by the monthly EMI. If this ratio falls between 1 to 1.5, then it is wise to buy a house. But if this ratio goes above 2.5 (e.g. 70 thousand EMI and 25 thousand rent), then from financial point of view it is more beneficial to stay on rent and invest the rest of the money.
Is your own house or a rented room right for you?
The mathematics of money has its place, but there is a different comfort in having one’s own home. When you have your own house, no landlord can suddenly throw you out, you can decorate the house as per your wish and you have a permanent place to live in old age. At the same time, the biggest advantage of living on rent is that you do not face any problem in changing cities for job and you can live in a very good location even in a low budget.
If you have a stable job, have enough money for down payment and want to stay in the same city for the next 10-15 years, then buying a house would be the right step. But if your age is between 20 to 35 years, there is scope for change in career and you can invest the remaining money with discipline, then living on rent is the best path for you.
Disclaimer: This article is for information only and should not be considered as investment advice in any way. TV9 Bharatvarsha advises its readers and viewers to consult their financial advisors before taking any money-related decisions.
