How has the math of buying a home versus renting changed in 25 years?
After just 15 days, we are going to step into the 26th year of the twenty-first century. With the pace of time, the mathematics of buying ‘own house’, the biggest dream of the Indian middle class, has also changed. If you are making a budget for house warming or a rented house in the new year, then know that the financial rules that were applicable in the year 2000 have completely changed. Earlier this decision was taken only by looking at the bank passbook, but now new characters like ‘Lifestyle’, ‘Interest Rates’ and ‘Opportunity Cost’ have come into this story.
When buying a house was really a ‘winner deal’
If we remember the early 2000s, the picture was completely different from today. In Delhi and other big cities, a typical house was available for between Rs 10 to 40 lakh. Then Home Loan EMI There was no huge difference between (EMI) and house rent. This was the reason why for most of the middle class families, it was a wiser decision to pay the bank installment instead of deducting the rent receipt.
At that time, taking loan from banks was a little easier than today and the burden of down payment was also lighter. In those times, buying property was not just a way to hide your head, but was considered the most direct and reliable way to create wealth.
How did the balance of rent and EMI change after the recession?
The real turning point in the story came after the economic crisis of 2008. Between 2010 and 2020, the property market took many turns. Due to increase in demand in metro cities, there was such a surge in property prices that it started becoming beyond the reach of the common man. Today the situation is such that it is difficult to get even a small house for less than Rs 50 lakh in Delhi-NCR. Whereas, if we talk about luxury segment, the prices in DLF Camellias, Gurgaon have started from Rs 73 crores to Rs 190 crores.
Not only this, now the gap between ‘rent and EMI’ has become very wide. The mathematics of big cities has started to show that living on rent rather than paying huge EMIs is financially less burdensome on the pocket. The house whose EMI is Rs 50 thousand is available on rent for Rs 20 to 25 thousand.
The price of the house is more than what it is worth.
Suppose you buy a flat worth Rs 1 crore and for this you take a home loan of Rs 80 lakh from the bank. According to 9% interest rate and tenure of 20 years, you will have to pay EMI of approximately Rs 72,000 every month.
The surprising thing is that in 20 years you pay a total of around Rs 1.73 crore. Out of this, about Rs 93 lakh goes to the bank only in the form of interest. That means, you pay almost the same amount in interest for the amount you buy a house for. If you take a loan for 30 years instead of 20, you will have to pay more interest to the bank than the value of your house.
On the other hand, the rental yield in Indian cities is only 3.5% to 5%. That means, the rent of a house worth Rs 1 crore is usually not more than Rs 30-40 thousand per month. If the difference between down payment and EMI is invested in mutual funds, then in 20 years this money can give many times more returns than the property.
What is the right decision?
Actually, with time, the rule of ‘one size fits all’ no longer applies. Living on rent gives you the flexibility to change cities and jobs, while owning a home provides emotional security. Financial expert CA Kaushik advises not to take decisions emotionally. Buy a house only if you are going to live there for at least 7-10 years.
Planning should be such that EMI should not be more than 25-30% of your salary. Most importantly, build a strong emergency fund before buying a house so that the loan burden does not weigh you down in difficult times. There is nothing wrong in buying a house, but buying it at the wrong time without doing the right math can spoil your financial health.
Also read- This is how the world of investment changed in 25 years, mutual fund industry created history, treasury crossed ₹ 80 lakh crore.
Also read- Pay rent or pay EMI? Understand this math before buying a house