Arsh is in a dilemma that he should buy a house or rent it. After his college and an MBA, Arsh saw his dream come true when he landed into decent job placement. He spent a few years of his career in Hyderabad, then few in Pune and then Mumbai. Basically moving cities to grab a good opportunity. Now in a few months, He will be married and before that, he wants to tick off the “owning a house” dream from his bucket list. More than a dream, it’s a sense of “settling down”. Buying a house is not a day’s plan, but years of commitment and planning.
So this article is a fun approach to a big question that one always faces at the start of his managing personal finance. Should we buy or rent a house? It always has been a debate about your precious dream home, let’s solve it for once and for all.
To start with, we will categorise three ideal and most probable scenarios you will be in. The categories are:
Apna ghar toh apna hota hai (Buying your dream house, right at the start)
Loan ka chakkar hai Babu bhaiya! ( Paying rent for your entire life! )
Kab tak Kiraya denge? (Eventually, you end up buying a house after few years of rent)
We will talk in financial aspects( it’s all about money! ) and then pros and cons in each scenario. Few Assumptions throughout the article:
Arsh currently gets an in-hand salary of approx ₹70k after all tax-deductions.
We will consider the scenarios for 30 years of living.
Let’s start!
Apna ghar toh apna hota hai
So Arsh works in an SEZ in Mumbai Suburbs and wants to have a house of his own. So he decides to buy a spacious house for his family. Arsh discovers a property which is exactly how he wanted, a 2BHK with all facilities like a great view, swimming pool, gym and community hall, closer to a mall, hospital and school etc. It will cost him ₹1.8 crores with registration. Now he starts thinking about financing his ideal home, jot downs some points:
Savings (Bank Account + Emergency Funds + Mutual Funds + FDs) - ₹11 lakhs
Family, Friends and Relative’s Fund(Taken as Interest-Free loans) - ₹20 lakhs
Keeping aside some money for yourself to avoid starving - ₹5 lakhs
So the money that he can pump in is around ₹30 lakhs, with more small informal loans(and it’s the truth, people do!). This goes for the downpayment of the home loan.
Now Arsh starts the enquiry for home loans for his house. Now we will consider here that, Arsh has a good credit score, only attributed by his credit card timely payments and no prior loans. So Arsh is ready to pay about 60% of his monthly income i.e. ₹40000 so that he is not crushed under the payment of loans, sacrificing immediate needs.
After researching the market, looking for various schemes and methods of financing, Arsh realised that he can only afford to cover the following property costs:
₹63 Lacs for the tenure of 10 years of home loan
₹78 Lacs for the tenure of 20 years
₹85 Lacs for the tenure of 30 years
The loan has been calculated on the basis of ₹30 Lacs downpayment, best market floating ROI of 8% (best case and to make things simple) and ₹ 40,000 initial EMIs.
With a heavy heart, Arsh had to look for a different property away from the office, few compromises in his dreams and facilities in his dream home. He settles for a ₹ 80 Lacs home in a good Cooperative society, bit away from the office and with minimal amenities.
In the span for the next 30 years, Arsh will end up in two scenarios:
Best case: Pays the loan in 15 years
Loans from Family and Friends + Informal Loan: ₹25 Lacs
Principal paid: ₹50 Lacs
Interest paid: ₹36 Lacs
Maintenance paid over 30 years: ₹20.3 Lacs (₹50,000/year increasing at 2% every year, used G.P.)
Total Paid: ₹1.31 crores + Informal Loan Interest
Actual case: Takes complete tenure of 20 years
Loans from Family and Friends + Informal Loan: ₹ 25 Lacs
Principal paid: ₹ 50 Lacs
Interest paid: ₹ 50.37 Lacs
Maintenance paid over 30 years: ₹20.3 Lacs (₹50,000/year increasing at 2% every year, used G.P.)
Total Paid: ₹1.45 crores + Informal Loan Interest
Tax-saving Angle:
Section 80EE: Though being a first-time homebuyer, It doesn’t apply in this case, as the loan value is greater than ₹35 Lacs and the property value is greater than ₹50 Lacs.
Section 80C and 24: If we go by amortization for principal and interest paid over the years(Table), Gets approx ₹13 Lacs as reimbursement
Pros:
Sense of Independence or “our home”
Ownership of the house right from start.
Cons:
Everything is merry as long as you have a constant salary pouring in.
Puts you in a strict budget for the next 15-20 years.
Most of the time, you end up compromising on your dream house, as long as you don’t have a very high-paying job.
You end up giving your savings and you hardly save for the next few years.
If you had to move out of the city, It’s additional baggage to manage.
Loan ka chakkar hai Babu bhaiya!
So now, for this discussion, Arsh has a funda, that “Loans are bad”. Arsh discovers that the 2BHK apartment he had eyes on, worth ₹1.8 crores, can rent an unfurnished one for ₹35000 including Maintainance. He immediately struck a deal with the owner and signed a Rent Agreement.
Highlights of the Rent Agreement were:
Initial Rent will be ₹35,000 with an annual increase of 7%. (usually, market rent increment varies from 4% to 10%)
The agreement was signed for 5 years with compensation of 1 month’s rent in case vacates early.
Access to all Society facilities like swimming pool, gym, club and community hall.
For the first 5 years, Arsh paid a rent of around ₹24.15 Lacs
For the fact that real estate prices go up by an average of 4 to 12% every 5 years across India.
Arsh shifts every 5 years to similar apartments or renews his Agreements on the market price.
For 6th -10th year, Arsh paid a rent of around ₹25.5 Lacs with start as ₹37,000 and 7% annual inc.
For 11th -15th year, Arsh paid a rent of around ₹27.6 Lacs with start as ₹40,000 and 7% annual inc.
For 16th -20th year, Arsh paid a rent of around ₹29 Lacs with start as ₹42,500 and 7% annual inc.
For 21st -25th year, Arsh paid a rent of around ₹31 Lacs with start as ₹45,000 and 7% annual inc.
For 26th -30th year, Arsh paid a rent of around ₹34 Lacs with start as ₹48,000 and 7% annual inc.
Total Paid over 30 years: ₹1.71 crores
Tax-saving Angle:
Section 10-13A: For the HRA claim over the year(table), an assumption that HRA is always 50% of base CTC (i.e. base = basic + HRA), One will save approx ₹34 Lacs over 30 years.
Pros:
No compromises in terms of your dream home “feel”.
Flexibility to move out of the city or change offices in the city.
Even if you lose your job or any crisis hits you, you can always fall back to a cheaper option.
It doesn’t restrict your budget, you can always weigh in your requirements and rent accordingly.
Cons:
It’s not your dream home, the sense of Independence lacks emotionally.
May not be a great choice for those, who don’t like moving around but want a home to settle. (You can actually get a good deal from the owner if you are planning to stay long)
Kab tak Kiraya denge?
Arsh acts smart in this case and starts with renting out the ₹80 Lacs apartment, which we had discussed at the start. He discovers that the apartment is being rent out for ₹20,000 per month. So now he plans to buy his dream house 10 years down the line.
Lets’s form major sections of his monthly income plan for that:
Rent - 30%, Mutual Fund SIP - 20%, Savings - 20%, Expenditure - 30%
Rent:
We will follow the trend from the above case, with starting rent at ₹20,000
For the first 5 years, Arsh paid a rent of around ₹13.8 Lacs with start as ₹20,000 and 7% annual inc.
Next 5 years, Arsh paid a rent of around ₹15.2 Lacs with start as ₹22,000 and 7% annual inc.
Mutual Fund:
With an initial investment as ₹15,000/month as a SIP and 30% increase in investment growth annually. (i.e. Next year 20,000/month as a SIP) for 10 years.
Expecting a minimal return rate at 12% over the period of 10 years.
Total Investment Amount: ₹76.7 Lacs
Total Earnings: ₹51.5 Lacs
Total Corpus in hand after 10 years: ₹1.28 crores
Savings:
With the initial gross salary of ₹70,000, Arsh could save ₹14,000/month
With the assumption of at least 6% of annual compensation, savings increase by 6%.
Over the 10 years, Arsh saved around ₹22.1 Lacs without savings account Interest.
Here, to be practical, Arsh used up his 60% savings over these 10 years. (i.e. 10 Lacs + interest)
With 4% trend in real-estate, the ₹1.80 crores apartment has shot to ₹2 crores(Extreme case, in reality, the price may not be at that level)
With Downpayment of ₹1.2 crores, Arsh secures a loan for a property worth ₹2 crores, with a monthly instalment of ₹77,000, at a monthly salary of ₹1,40,000/month with ₹20 Lacs in savings(Unused in downpayment) for 15 years tenure.
In the span of 20 years,
Best case: Pays the loan in 10 years
Principal paid: ₹80 Lacs
Interest paid: ₹36.47 Lacs
Maintenance paid over 20 years: ₹19.5 Lacs (₹80,000/year increasing at 2% every year, used G.P.)
Total Paid: ₹1.36 crores
Actual case: Takes complete tenure of 15 years
Principal paid: ₹ 80 Lacs
Interest paid: ₹ 57.6 Lacs
Maintenance paid over 30 years: ₹19.5 Lacs (₹50,000/year increasing at 2% every year, used G.P.)
Total Paid: ₹1.57 crores
Total Investment: ₹1.57 crores + ₹29 Lacs(Rent) + ₹76.7 Lacs - 20 Lacs = ₹2.43 crores
Tax-saving Angle:
Section 80C and 24: If we go by amortization for principal and interest paid over the years(Table), Gets approx ₹15.5 Lacs as reimbursement.
Section 10-13A: For the HRA claim over the year(table), an assumption that HRA is always 50% of base CTC (i.e. base = basic + HRA), One will save approx ₹7.9 Lacs over initial 10 years.
Pros:
A safe and much better approach to own a house.
Gives flexibility for initial years of your career.
Ultimately, you own a house of your dreams with no compromise
A stress-free experience like the one where we rented throughout.
Cons:
Overall spend maybe more.
Conclusion
Renting for life doesn’t harm. But if you want to own a house, if it’s an ultimate dream of yours, please wait for initial years. Plan, invest and build a corpus for about 75% of the property value and help yourself with a loan for the rest, which will be a lot easier to pay off. Happy Saving! A happy home to you :)