Should I take home loan or live on rent?

Who doesn’t want to live in a self-owned home? Who loves to live on the rules made by the landlord? No one, right? Often individuals have to decide between living in a rented flat or in a house of their own.

Further Reading: Tax Saver Funds 

Middle-class individuals who are living in metropolitan cities, for them buying a home of their own is not easy, because of the escalated prices of properties in such cities.

As a result, people are left with the option of resorting to home loans for fulfilling their dream of owning a home or else have to continue to live in a rented apartment.

Often individuals get baffled as both the options have their own advantages and disadvantages.

In this blog, we are going to help you with this so that you can choose the best and right course of action for yourself.

Benefits of Living in a Rented flat

You will be able to save more money out of your income which you can always invest in mutual funds for accomplishing your financial goals.

You can live a life without any liability or burden of debt

Relocation is much easier in case of any job change, etc

You can claim HRA exemption

Disadvantages that come with living in a rented flat

You cannot do of your own mind, you have to abide by the rules of the landlord

Rents will be increased every year by a certain percentage

The landlord may decide not to renew expired rent agreement and ask you to leave

Benefits of Owning home by taking a loan

Brings a feeling of ownership or pride to the home buyer

House is an asset which appreciates over a period of time

Own house provides financial security to the family

Home loan EMIs do not rise every year (in case of a change in interest rate, you can increase/decrease tenure/EMI of the loan)

You can avail deduction under section 24 as well as under section 80C

Disadvantages of taking a home loan

A major portion of your take-home salary which could be as high up to 50%, will go into home loan EMI

Not just EMI repayment, you also need to pay down payment as loan issuing institution requires you to pay a part of the total home value which could be anywhere between 10% to 30%.

Suppose an individual wants to buy a house worth Rs. 50 lakhs by taking a home loan and the bank requires them to pay around 20% of house’s worth as down payment which will come out to be around Rs. 10 lakhs.

The bank will grant a loan on rest 40 lakhs. Now suppose the tenure of the loan is 15 years and the rate of interest on which this loan is given is 8.5%.

So, if I calculate EMI on this loan amount then it will come out to be Rs. 39,390 approximately. So first of all, the question arises whether you will be able to service your EMIs or not.

If your disposable income is not enough to service home loan EMIs then you are left with no other option.

The problem arises when your income is sufficient to service EMIs because then you have to make a choice that whether you should continue living in a rented apartment or should you make a decision of buying a home of your own by availing the loan.

If the difference between home loan EMI and your rent is not much then you can straight away go for buying a home of your own.

In case the difference is substantial, then continue reading ahead.

Let us take two scenarios wherein in one an individual is living on rent while in the other he/she has availed home loan.

Scenario 1 – Living on rent

For instance, you are a 30 years old individual who is living in a 2-BHK flat and paying a rent of Rs. 15,000 per month. As per the rent agreement, the rent will be increased at the rate of 5% p.a.

Scenario 2 – Availing a home loan

Suppose you have bought a 2-BHK flat worth Rs. 56.25 lakhs by availing a home loan of Rs. 45 lakhs for a tenure of 20 years and paid Rs. 11.25 lakhs in down payment.

The home loan interest rate is around 8.5% which will result in a monthly EMI of around Rs. 39,050 per month.

Assumptions (Common for Scenario 1 & 2)

Home loan interest rate will remain constant throughout the tenure

The surplus amount will be invested @10% rate of interest on an annual basis

Rent and value of house property are increasing at 5% p.a.

Further Reading: Mutual Fund Sahi Hai

First 20 years after availing loan

Scenario 1 Calculation Scenario 2 Calculation
15,000 p.m. rent paid for next 20 years

(A)

59.51 lakhs Home loan EMIs paid in 20 years

(A)

93.72 lakhs
11.25 lakhs down payment invested @10% for next 20 years

(B)

75.68 lakhs Appreciation in value of asset

(B)

1.49 crore
Surplus (Net of EMI and rent) invested

(C)

1.33 crore
Overall Savings (B+C-A) 1.49 crore Overall Savings (B-A) 55.28 lakhs

Explanation 

In Scenario 1, we have calculated three things –

51 lakhs – is the sum total of rent payable by you over a period of 20 years which is increasing at a rate of 5%

25 lakhs – home loan down payment (11.25 lakhs) is invested at a rate of 10%. This amount is considered as invested as it will be a surplus if the decision to take a home loan is not made

33 crore – The difference between the annual home loan EMI to be paid and the annual rent payable has also been considered as surplus as you will be saving this much amount in the initial 20 years as home loan EMIs are greater than rent

The overall savings in Scenario 1 will come out to be around 1.49 crore

In Scenario 2, we have taken two things –

72 lakhs – it is the total amount you will pay in 20 years towards servicing your home loan. Simply put, it is the total amount you will pay in the form of EMIs

49 crore – this figure is achieved by appreciating the value of the acquired home for 20 years

The overall savings in Scenario 2 will come out to be around 55.28 lakhs. Hence, Scenario 1 turns out to be better in the first 20 years. Now let’s see how much savings will you make in the next 20 years i.e. post completion of your home loan.

Also Read: Risk-O-meter in mutual funds

Next 20 years post completion of a loan

Scenario 1 Calculation Scenario 2 Calculation

 

Continued paying increased rent

(A)

1.57 crore Surplus invested i.e. rent saved

(A)

4.28 crore
Down payment investment continued

(B)

5.09 crore Appreciation in value of asset

(B)

3.59 crore
Surplus investment continued

(C)

9.00 crore Surplus invested (EMI amount saved)

(C)

2.82 crore
Overall Savings (B+C-A) 12.52 crore Overall Savings (A+B+C) 10.69 crore

 Explanation 

 In Scenario 1, again there are three things –

57 crore – this figure is the total amount of increased rent to be paid in the next 20 years

09 crore – this figure is the future value of the investment of down payment amount, made for 20 years as we have assumed that it has not been utilized anywhere and hence, the earlier investment is continued further

00 crore – The surplus i.e. net of EMI and rent which was invested earlier remain untouched for another 20 years. Simply put, the amount of Rs. 1.33 crore at the end of the initial 20 years remains invested for another 20 years at the same rate

The overall savings come out to be somewhere around Rs. 12.52 crore in Scenario 1.

In Scenario 2, there are three things now –

28 crore – Surplus as a result of rent saved post 20 years is assumed to be invested. In other words, it is the amount which otherwise you would be paying as rent in case you don’t choose to live in your own home

59 crore – this is the appreciated value of the purchased house

82 crore – post completion of home loan no more EMIs are to be paid and hence this saved amount can also be invested. This figure is the equivalent to the amount of EMI saved and invested annually @10%

The overall savings come out to be somewhere around Rs. 10.69 crore in Scenario 2.

Scenario 1 takes a lead by 1.83 crores in terms of overall savings even in the post 20 years.

Conclusion

The decision between living on rent and taking a home loan is more of a choice between ownership with debt and an enhanced lifestyle with no asset to fall back on.

Owning a home of your own brings personal satisfaction and respect in society. It will also help in saving shifting costs that an individual might have to incur from time to time in case the person is living on rent.

Also, having a home of your own frees you from all kinds of problems that may arise between tenant-landlord relationships.

Owning your own house also helps you in getting credit in the form of loans/credit cards easily at preferable rates in future.

Whereas living on rent gives you more freedom in terms of mobility as individuals who buy a home of their own cannot change it on a frequent basis and have to stick with their own home.

Living on rent is also a better option in financial terms as discussed above. However, it is possible only when an individual is very disciplined and invest the surplus amount from time to time. This kind of behaviour is difficult to find in investors nowadays.

Ultimately the decision is in your hands so choose wisely as buying a home is a very big decision in one’s life and hence one should give a good amount of thought towards making this decision.

I hope I was able to solve your dilemma to some extent. In case you have any doubts please comment below in the comment section.

Further Reading: Financial Express

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