Mohit moved out of his hometown 14 years back. First, four years of college in Bengaluru, then two years in Ahmedabad to complete his MBA. Soon after, he joined a Hyderabad-based enterprise. Since then, he has lived in five cities in eight years, practically living out of his suitcase. Mohit is getting married in a few months, and hence, he is considering a few lifestyle changes – one of them requires a major financial commitment, and that is whether to buy a house or keep living on rent.
The perception of settling down has always been associated with buying a house. Fair enough! However, since it involves major money decisions, we have to get more realistic about our means.
The argument – buying vs renting a home – seems futile. More than being right or wrong, it is a matter of choice and affordability.
In this blog, we analyzed both the options in detail and answered a few key questions that are often asked – Till when one should live on rent? How can one build a corpus to buy a house? And, when is the right time to buy your own?
The argument for buying vs renting a house – Why pay rent when you can pay EMI and own an asset
This is the top most argument people who want to convince you to buy a home give. It could be your parents, your friends or your bank relationship manager.
While at the face of it, it does make sense as house value increases while you don’t get anything from the rent you are paying. But as you dig deeper there is a major flaw in this argument. The primary reasons are the insane cost of real estate in India and our approach to buying a house. Let’s understand this with an example of Mohit.
Mohit lives on rent in a 2BHK in a prime location in Gurgaon and pays Rs. 50,000 as rent. Now if he has to buy a house where his EMI would come to the same amount as his rent, he surely won’t find a house in the location he is living in. So, he has to compromise and find a house somewhere on the outskirts of the city and therefore has to compromise on the lifestyle if he wants to fulfill this dream.
Let’s say Mohit doesn’t want to make that compromise (like most of us) and decides to take a bigger loan and buy his dream home in the city. And that leads us to the next problem.
Home Loan + Dream Home = Recipe for stress
Just like Mohit, we all want to buy our dream home and with the easy availability of loans, it seems a reality. So we go ahead and take huge loans and squeeze our monthly budgets to make sure we are able to pay the EMIs. And for the downpayment we go all out, taking out all our savings and if that’s not enough, taking help from our parents.
In the end, you have your dream home which is great. But you are unable to save for other important goals in life like your retirement or children’s education and plus your bank balance is back to zero as you have used all the savings. Combined with the uncertainty of the job market today, this can lead to a lot of stress in the future.
For Mohit, his dream house will cost him around Rs 1.5 crore. Now let’s see how this works out for him
| Buying Price | ₹1.50 crore |
| Downpayment | ₹30 lakh |
| Loan from bank | ₹1.20 crore |
| Interest rate | 8% |
| Monthly EMI | ₹1.03 lakh |
| Total amount paid to bank after 20 years | ₹2,40,89,474 |
| Interest amount paid to bank after 20 years | ₹1,20,89,474 |
He pays 20 percent of the total amount i.e. Rs 30 lakh as the downpayment of the house. The rest Rs 1.20 crore will be paid by the bank. At 8 percent housing loan interest rate, the EMI amount would be Rs. 1.03 lakhs. So his expense on accommodation will go from Rs. 50,000 to Rs 1.03 lakhs. That’s a 100% increase.
Also, if you take a housing loan of Rs 1.20 crore at 8 percent, then at the end of 20 years, you pay the bank a total of Rs 2,40,89,474. As much as Rs1,20,89,474 only as the interest amount.So the cost of the loan is higher than the loan itself!
But wait, what about all the tax benefits Home Loans come with?
Yes. This is another major reason people think buying a house is a smart idea. With tax benefits on the principal amount, the interest you pay plus some more benefits if you are a first-time buyer, it does look like home loans are a smart way to reduce tax and own your house
Tax Benefits on Housing Loan
| Section 80C |
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| Section 24 |
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| Section 80 |
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However, in the initial years of your loan tenure, the interest component forms the major chunk of your EMI, you won’t be able to claim the complete Rs. 1.5 lakh benefit underSection 80C. Assuming you are in the 30 percent tax bracket, the tax saving will be around Rs 60,000 on the interest amount paid.
The case of Renting – No debt, tax benefit of HRA, and flexibility of change
So, for the initial few years, living on rent, will give you the breather to sort your finances and save some money toward buying a house. Also if you are living on rent, you can claim the tax benefit on your House Rent Allowance (HRA).
In today’s world when mobility is a key to career growth, owning a house sometimes acts as a deciding factor whether you will go to a new city or not. Even if you do move, finding a tenant and making sure your house is taken care of, is a tough task. On the other hand, living on rent means you have one less thing to worry about. Also, you have the flexibility to move houses to a location close to your office if you change jobs within the city. The time saved on commuting makes a big difference in quality of life, especially in Indian metros.
Secondly, while the homeowners get a host of tax-benefits, renters also get some relief via exemptions on the HRA component of their salary.
How is HRA calculated?
The amount of HRA is lower of the following:
- HRA received from an employer
- Actual rent paid less 10 percent of basic monthly salary
- 50 percent of basic salary if the taxpayer is living in a metro city
- 40 percent of basic salary if the taxpayer is living in a non-metro city
As the lowest of the above is exempt from tax. Hence, it is common for employers and employees to structure the salary in a manner so that maximumtax exemptioncan be availed under this head.
And lastly, and perhaps the most important is that you won’t have any debt. This means not only do you live a slightly less stressful life, you can also take some risks with your career like joining a start-up where salary might not be high but you get to learn.
So, does that mean you should live on rent forever?
Well, we are not saying that. Having your own home is a big milestone for most Indians and there are always emotions connected to it.
But it is a big financial decision. So, buy a house only when you are able to put at least 50 percent of the property price from your own pocket and also you have double that amount as other financial assets. For instance, in Mohit’s case he should have at least Rs. 75 lakhs if not more before he considers buying a Rs. 1.5 crore house. While collecting that much money might take time, this ensures he is not unnecessarily saddled with debt.
Another approach Mohit or even you can take is to not buy your dream home as your first home. You should settle for something that fits in your budget and then in a few years, as you build a corpus, upgrade to a new house. For Mohit, if he invests that Rs. 50,000 he is willing to give every month extra for EMIs, after 10 years, his investment value will be Rs. 1.15 crore on an investment of Rs. 60 lakhs.
Bottom line:
Buying your dream home is a goal you should fulfill but if you really want to enjoy the feeling of being at your own home, you need to plan properly. Else you might have a home but a huge loan and not enough for goals like your retirement or children’s education will cause more stress than happiness.
