Rent vis-à-vis EMI – how to navigate the conundrum

by Sreedhara R Bhat, Managing Direcor (MD) & Chief Investment Officer at ARA Financial Services Pvt. Ltd.

From the days of zamindars to the present-day co-working/living spaces, India’s real estate has come a long way. Historically, ownership of properties was limited to the richer class. Real Estate has been an important wealth creating asset class from time immemorial. Though a decent number of people in India have been inheriting ancestral properties, everyone hasvaried reasons for buying more. Some buy properties as an Asset Allocation while some do it for investment purposes or to save rent. Some buy because of its historical returns while some buy because this is the only asset class they understand after Life Insurance. Some buy it to secure their children’s futurewhile some buy it on loan to save tax. In many parts of India, people even consider it as a keyto getting a good bridefor their son or as a marriage gift to the daughter.

For the previous generations, who saw the home loan rates above 10%, buying a home was a totally different approach. Normally for the middle-class families, it was only close to the retirement that they accumulated enough corpus to own a house considering tight lending norms back then. And they would generally prefer taking the minimum possible loan for this. Today (with middle-class getting divided into upper and lower middle-class), people in their early to mid-thirties are seriously considering owning a house. With relaxed lending norms, reduced interest rates coupled with higher disposable incomes, the present generation is experiencing the ease ofowning a house at quite an early stage of their life. There is a thought which is common – Why not pay EMI and own a home rather than paying rent? We all undergo this dilemma at some point of time and there is no ‘one size fits all’ answer to it.

It is good to see this changing trend, but it is very much important to visualise the future probabilities before taking a plunge. After all, this is one of the most important decisions of one’s life as the sentiment of living in own home is just priceless. Based on our experience of interacting with clients of varied age groups, backgrounds, and experiences, we have collated some thoughts.We believe that it will be a valuable input for the breadwinners who are working hard, trying to balance their commitments towards children’s future needs, own retirement corpus, owning a house, supporting the parents (or in-laws) and in some cases even supporting the siblings to settle down.

With easy loan availability coupled with the ability to afford the EMI (dual income), buying a property on loan is almost becoming a tradition. In fact, many people even believe that taking a home loan is good way to save taxes. Though unless one has a sufficient corpus, it may not be viable to buy a house without a loan. In such scenarios,considering the future cashflows, one should calculate what percentage of the total property cost should be taken as loan. Repaying the loan at the earliest (not beyond 4-5 years) makes a financially prudent decision.In fact, we have observed that pre-closing the loans become the major life goal for most people which sometimes even puts their other life goals on a back seat. Hence one should take an informed decision considering the future cashflows.

Most people avail a loan basis the comfort of dual income in family. But later either due to family commitments, changes in the job market or a need for career break, the family might have to be dependent on single income for all their financial obligations including the EMI. These circumstances can become a stress point if not foreseen and planned for.

More importantly, the present-day jobs have made most people quite mobile. A transferrable job or switching job for a better career growthmight require one to relocateto a different city, state, or a country. In such circumstances, one ends up payinga rent at the new place of residence along with the loan EMI. And one might end up letting out the own house which might be of meagre help considering the lower rental yields and the tax onrent.

Generally, we have observed that in the age of around 43 – 47 years, people generally get stable with their career and have got to the peakof growth (there are exceptions).And as people grow in their career, many prefer to upgrade their lifestyle and over time, they prefer upgrading their homes too. Either from a smaller flat to a bit more spacious one with better amenities or from an apartment to a villa or an independent house. And some even prefer to relocateprioritising their children’s educational needs. This is commonly observed among those who buy their first home in their early or mid-thirties. And most of the time they end up taking a good amount of loan for the second home too.

And for those who contend that instead of paying rent, it is better to pay EMI and build an asset, the argument certainly holds true provided the proposed EMI and the rent you are paying are either same or have minimal difference. Unlike the developed countries, India has a higher borrowing cost still and the rental yield works out to hardly 3% – 3.50%. So, it is quite difficult to match your rent outflow to the EMI unless you go with lower loan funding. Even if one considers it from an investment point of view, the rental yield in India makes it less lucrative when compared to the developed countries.

Post pandemic, a new trend of work from home culture has caught the fervour. The choices of home buyers have changed. People have been temporarily shifting their base back to their extended families in other cities (rural areas) and working remotely. Real estate prices have been stagnant for a few years now. Inoculation has brought down the intensity of virus in India and the economy has started to bounce back giving stability to employment levels. This coupled with lower interest rate is attracting home buyers and housing sales also showed some signs of improvement in certain cities.All through the pandemic, the spending on travel, social gatherings, discretionary purchases became almost nil resulting in accumulation of surplus funds. People are contemplating on investing the surplus and going in for a home as EMIs look manageable. This is a good move provided one is buying it for self-occupation and more importantly, targeting to close the loan at the earliest.

Buying a home, which needs a huge outflow, must be done in a much-planned manner. An individual’s affordability, lifestyle, work profile (job security), financial conditions/cashflow are the key parameters that must be factored while purchasing a house. Apart from these, one should maintain a buffer to manage the monthly outflows (including the EMI) for a period of one to two years so that it can help in managing any uncertainty related to job, health, family etc.Despite the caveats and irrespective of the age, if one has financial support from the family or foresees a strong cashflow to pre-close the loan in a span of 3-5 years, then one must consider going for it. After all, the fulfilment of owning a dream home is immeasurable.