As the unwritten fact of most middle-class families goes, investments in gold and property are looked upon as the best instrument (obviously, after education). In India, purchasing a home, whether through lumpsum funds or by availing of a 75-lakh home loan EMI or 30 Lakh Home Loan EMI is looked upon as being settled. However, for the others renting a home appears somewhat feasible as it permits them to a higher cash flow for important life goals and expenses. Also, if you have a transferable job, then it requires relocation to distinct cities at periodic intervals. Here’s where renting a house is a good deal.
However, given the backdrop of COVID and the resultant crisis, the importance of owning a home has been felt extremely by many. There is an evident enhanced preference towards purchasing a house instead of renting, underlying the advantages of financial and social security.
Let’s figure out what is usually feasible purchasing vs renting a home –
Financial aspect –
Suppose Mr Rai, a 25-year-old graduate working in Mumbai and staying in a rented apartment of 1 BHK. He earns a monthly income of 70,000, and his retirement age is 58 years. Consider that in 33 years, his average annual salary increases by 5 per cent.
Rent a home –
As of 2022, the average monthly rent in decent localities of Navi Mumbai like Airoli, Khairane, Kopar, Vashi etc., is nearly 20,000 for a 1 BHK flat and nearly Rs 30,000 for a flat of 2 BHK. Consider for the upcoming ten years he stays in 1 BHK rented houses and once he has a family, he shifts to 2 BHK apartment when he reached 35 years of age.
Now, if the rents increase by 5 per cent annually, his rental payments will be –
|Age||House||Rent (monthly)||% Of salary as per the rent||Time – period||Overall rent paid|
|25 – 35 years||1 BHK||20,000||30 per cent||10 years||24 lakhs|
|35 – 58 years||2 BHK||30,000||40 per cent||23 years||82.80 lakhs|
|Overall rent paid in 33 years||Rs 1.06 crore|
In 33 years, Mr Rai would pay about 30 – 40 per cent of his salary in the form of rent and have higher cash in hand for his living expenditures.
Purchasing a home (rent vs buy) –
To state the fact, purchasing a home is not simple as renting one. However, it is not this tough even as it is looked upon. It is only the initial down payment amount that you require arranging from your pocket, and the remaining is taken care of by a home loan. With home loans being more transparent and lower priced than ever before, purchasing a house is simple.
Forming the down payment amount –
Let’s assume Mr Rai reserves more than half or nearly half of his income for three years for down payment funds for buying a home. Suppose he invests Rs 25,000 in recurring deposit at an Current Home Loan Interest Rate of 7 per cent p.a. Towards the end of 3 – a year tenure, he will have a maturity amount of Rs 10 lakhs.
Home loan for purchasing a home –
Taking up a conservative approach of a 5 per cent annual salary increment, Mr Rai’s salary would be nearly Rs 80,000 by the time he is 28 years old. Now according to his salary, he will be entitled to a home loan of as high as Rs 42 lakh for a tenure of 20 years, assuming the rate of interest on the home loan is 8 per cent p.a.
You might read about how this loan amount is computed based on your income. Apart from your salary, a home loan is even granted by the lender post thorough checks on your repayment capacity and a few financial and technical aspects of the property you purchased.
A 2 BHK apartment in an area where Mr Rai currently stays would cost roughly between Rs 80 lakh and 90 lakhs. This would indeed roughly need around a down payment of Rs 20 lakh, and the home loan EMI would be approximately Rs 55,000 to Rs 65,000.
However, with this budget. Mr Rai can look ahead to purchase a home nearly 10 to 15 km away from his present home location like New Panvel, Panvel, Kalyan, etc., where an apartment of 2 BHK would come up to Rs 40 – 45 lakhs. Availing of a loan of nearly Rs 38 lakh for 20 years would be better as the EMI would be nearly Rs 32,000 for the upcoming 20 years.
Now, it’s a no-brainer that the place where a person pays the rent, he cannot purchase in the same city with the same pay level towards EMI.
Now, unlike rent, EMI stays nearly constant during the whole repayment tenure. Mr Rai’s loan repayment would be –
|Age||Home||EMI||Per centage of salary as EMI constituent||Time – period||Overall EMI|
|28 – 33 years||2 BHK||32,000 INR||45 – 55 per cent||5 years||19.20 lakh INR|
|33 – 38 years||2 BHK||32,000 INR||36 – 43 per cent||5 years||19.20 lakh INR|
|38 – 43 years||2 BHK||32,000 INR||28 – 34 per cent||5 years||19.20 lakh INR|
|43 – 48 years||2 BHK||32,000 INR||22 – 27 per cent||5 years||19.20 lakh INR|
|Overall, EMIs paid over a tenure of 20 years||76.80 lakh INR|
In these twenty years, Mr Rai would pay roughly 22 – 55 per cent of his income towards home loan EMI, leaving him with extremely less cash for his living expenditures initially. However, it would enhance with his salary increment as home loan EMI would stay constant across 20 years period.
Thus, if such a situation arises, as in the case of Mr Rai, then buying a home would be a prudent option for you. Doing so would allow you to put your monthly outgo for staying at home to better use.