When you are traveling from your home to office in Delhi/NCR, you can view big hoardings almost every km. The hoardings will show the new 1-2-3 BHK apartments from a real estate developer waiting for you to move in. The moment you see these hoardings, your emotions get stirred you think “Why the hell am i living on rent when so many options are available. Why not buy one and live comfortably?”
The decision to rent or buy a home lies, not on the hoardings, newspaper ads or call from a broker, but certain factors which not only changes your lifestyle but also other financial goals of life. Both have their pros and cons. What benefits your friend might make, may not be a suitable solution for you. The answer lies in understanding these and taking a decision as per your financial situation.
Ownership
Owning a house is not only an investment but a matter of pride for giving stability to yourself and family. You become self-sufficient and secure. Moreover, you get the freedom to maintain and decorate your house to suit your needs and your money spent on renovation is worth when value of your house appreciates.
Benefits:
When you buy a house, you have certain financial advantages which support your decision. If you have bought the house on mortgage, then fixed monthly repayment act like systematic savings, as your equity in house increases with time. Your cost of purchase remains stable since mortgage repayments do not increase with inflation, subject to rise in interest rates. Moreover, your personal networth increases over time and once you have completed your repayment; you can enjoy life free of rent or mortgage.
Disadvantages:
The house ownership has some disadvantages too, especially when your financial situation changes. Purchase cost tends to increase with payment of Stamp Duty, Registration Cost and Maintenance Cost. Also mortgage repayment is a long term commitment which affects your monthly budget if you stretch yourself too far.
If you have a transferable job or are getting an excellent job offer from other locations, then the house you have purchased makes it difficult to reach to a suitable decision.Also property values fluctuate in both directions.If you have bought one at a very high price or at peak then you end up paying more than the worth of house.
Renting
Often renting is cheaper than buying a house and is more flexible.You can choose a nice place which is within your budget and you are able to maintain the lifestyle you want.If something goes wrong the onus lies on owner to fix it.
Benefits:
The financial cost of renting is always lower.Your security deposit is less and the only loss to you will be the bond agreement you sign with the landlord.The regular cost apart from rent is almost nil as repair and maintenance responsibility lies with the owner. If you draw a budget, you can easily predict your monthly living cost and will not miss an opportunity to invest the savings in an alternative investment to earn good returns. Moreover,while changing your locations for job or if your job is transferable, the decision is not difficult.
Disadvantages:
Renting might look cheaper and affordable, but it has its own disadvantages. Firstly there is no security.If your owner cancels your agreement and asks you to leave, you don’t have an option.Sometimes,changing homes too frequently becomes a nightmare for you, if you have a family.Also, you miss out on creating an asset which ownership builds and you do not have the freedom to renovate or change your house according to your liking.
Thus, both options have their advantages and disadvantages. The benefit lies in choosing one which fits your current financial situation. In cities like Mumbai and Delhi/NCR, prices of so called affordable homes are out of the reach of the genuine buyers and so the decision to buy is that much more difficult.
Rent or Buy Calculator
Let’s understand this through a simple comparison.Suppose Mr. X buy a house of Rs.35 lakh with a 15% down payment. On a loan of Rs 29.75 lakh for 25 years at 9% p.a. interest, he will pay an EMI of Rs.23938. So his total cash outflow will be Rs.7181400. He will also pay 8% stamp duty and 1% brokerage & House Tax,of total cost (Rs.35 lakh), for entire period. His total outflow will be Rs.8056400. Now, if the value of house appreciates by 5% annually, he actually ends up earning Rs.6965147 in 25 years. (Appreciation value Rs.150214547). Mr. X achieves is sense of ownership and a debt free life going forward.
On other hand, if Mr. X takes a house on rent of Rs.8000 monthly increasing at inflation rate annually (5%), his total cash outflow will be Rs.4585802.He doesn’t have to pay any stamp duty and is not worried of house tax and insurance. The only extra cost is the brokerage of Rs.4000 paid to the broker. Now, if Mr. X invest the difference of Rs.15938 in an SIP for 25 years, assuming earning a decent 8% Return, he ends up earning Rs.9998969 in 25 years.The same amount invested even for five years will fetch Mr. X Rs 11,700,72 which can easily fund his down payment for the house..
Thus to Rent or buy a home decision does not depend on your emotions, but on a well-planned savings plan which minimize your EMI outgo and gives you the required stability in your personal life.
In the end, follow these simple rules to make your decision:
1. Factor in how much you can afford or what % of your net income will be your total cost.
2. Postpone your buying till you have 3-6 month emergency fund left even after down payment.
3. If you have other debts like credit cards, pay them off first.
4. Make your down payment to the maximum so that your EMI does not hit your monthly budget.
5. Aware yourself from all extra cost you will have to pay while owning the house.
6. Decides a time frame of your goal and start saving.