The age-old debate of whether to buy or rent a house is one that plagues many individuals and families at some point in their lives. Both options come with their own set of advantages and disadvantages, and the decision ultimately depends on your unique circumstances and financial goals.
In this blog, we’ll explore the key factors to consider when making this important choice.
One of the most critical factors to weigh is your current financial situation. Buying a home typically requires a substantial down payment, monthly mortgage payments, property taxes, insurance, and maintenance costs. Renting, on the other hand, often requires a more manageable upfront cost and a fixed monthly rent. If you have a stable income and are financially prepared for homeownership, buying may be a sensible choice. However, if your financial situation is uncertain or you prefer flexibility, renting might be the way to go.
Long-Term vs. Short-Term Plans
Consider your long-term plans when deciding whether to buy or rent. If you envision staying in the same location for many years, buying a house can be a smart investment. You’ll build equity over time and potentially benefit from property appreciation. Conversely, if you expect to relocate frequently due to work or personal reasons, renting provides the flexibility to move without the burden of selling a property.
Lifestyle and Personal Preferences
Consider your lifestyle and personal preferences when deciding between buying and renting. Homeownership offers stability and the opportunity to personalize your space. Renting provides flexibility, allowing you to test different neighbourhoods and housing styles before committing to a long-term investment.
So, what is better, buying a house or renting a house?
From a completely objective standpoint, renting emerges as the more financially advantageous choice, provided that the rental yield remains lower than the interest rates on home loans. In India, as of now, home loans come with an interest rate of at least 9%, whereas the present rental yield stands at around 3%. Consequently, instead of procuring a home through borrowing at 9% interest and committing to monthly EMIs for two to three decades, opting to rent the same property at approximately 3% of its total value becomes a more prudent course of action.
By choosing to rent, you can channel the remainder of the funds that would have otherwise gone towards servicing EMIs (which is essentially the difference between 9% and 3%, totalling 6% of the property’s overall cost annually) into well-performing equity mutual funds. Over the span of 20 to 30 years, this strategy can potentially amass a substantial sum, affording you the opportunity to purchase an even superior property.
Moreover, it provides you with the freedom to downsize to a smaller residence in the event of personal financial setbacks, such as job loss or salary reductions, as seen during challenging times like the COVID-19 pandemic. Contrastingly, had you purchased a home, financial difficulties would have resulted in defaults on your EMI payments.
Sanjay, a seasoned traveller through cities and careers, is on the brink of a significant life decision to buy a house or continue renting. The age-old debate of buying versus renting is not just a financial choice but a lifestyle one. In this exploration, we dissect both options, addressing common questions and shedding light on the intricacies involved.
The Pro-Buying Argument
The conventional wisdom of building equity through homeownership is persuasive. However, delving deeper reveals a flaw, especially in the context of India’s soaring real estate prices. Let’s take Sanjay as an example. Currently paying Rs. 60,000 as rent for a 2BHK in prime Pune, buying a comparable house in the same location proves financially unviable. Opting for a more affordable property on the city’s outskirts means compromising on lifestyle, a common dilemma for many.
The dream of owning a home often leads individuals to substantial home loans. While it fulfils the desire for a dream home, it also becomes a recipe for financial stress. For Sanjay’s dream house costing Rs. 1.8 crore, the financial breakdown over 20 years is as follows:
|Rs 1.80 crore
|Rs 36 lakh
|Loan from Bank
|Rs 1.44 crore
|Rs 1.15 lakh
|Total Paid to Bank After 20 Years
|Interest Paid to Bank After 20 Years
A 92% increase in accommodation expenses is a significant shift, and the high cost of loans can lead to stress, especially considering other financial goals like retirement and children’s education.
But What About Tax Benefits?
One of the major reasons for advocating homeownership is the associated tax benefits. Sections 80C, 24, and 80 provide deductions on the principal and interest amounts. Assuming Sanjay falls in the 30% tax bracket, the tax saving on the interest amount paid could be around Rs 70,000. While tax benefits are attractive, they may not outweigh the financial strain induced by hefty EMIs.
The Case for Renting: Flexibility and Financial Breathing Room
Renting, especially in the initial years, provides financial flexibility and the ability to save. HRA (House Rent Allowance) offers additional tax benefits. In a world where mobility is key for career growth, renting allows for easy transitions between cities without the burden of property management.
HRA calculation involves the lower HRA received from the employer, actual rent paid less than 10% of the basic monthly salary, 50% of the basic salary in a metro city, or 40% in a non-metro city.
Living on rent ensures no debt burden, granting individuals the freedom to take career risks or pursue opportunities without the constraints of EMI commitments.
Should You Rent Forever?
While owning a home is an emotional milestone, it is crucial to approach it as a significant financial decision. Buying should be considered when one can contribute at least 50% of the property price from personal savings and has double that amount in other financial assets. Alternatively, starting with a budget-friendly home and upgrading later as financial stability grows is a prudent approach.
Here is another perspective
While the financial aspects of renting versus buying are crucial, the seasoned individual emphasizes additional considerations. Renting comes with uncertainties, including the possibility of the owner entering the house or demanding rent at any time. The need to change houses every two years to avoid rent increases and the hassle of updating Aadhar and bank details with address changes further add to the complexities of renting. In light of these practical challenges, the experienced perspective suggests that if one can afford a new home, buying may offer a more stable and secure living arrangement.
In conclusion, buying your dream home is a goal worth pursuing, but meticulous planning is essential. A hasty decision might result in a home but also a substantial loan, causing more stress than happiness in the long run.
The decision to buy or rent a house is a significant one, influenced by various factors such as your financial situation, long-term plans, market conditions, and personal preferences. There is no one-size-fits-all answer, as what works for one person may not work for another. Ultimately, it’s crucial to assess your unique circumstances, consider the pros and cons of each option, and make an informed decision that aligns with your goals and aspirations.