Bank Home Loan EMI vs Monthly Rent: Which is better? These numbers may surprise you

Monthly Rent vs Bank Home Loan EMI: Been through rent or buy dilemma? If you are young and earning, this question must have come to your mind at least once. Persistent calls for home loans from telecallers may have also tempted you a number of times to say 'yes' and buy your dream home. If you are earning a lot of money, or you already have a lot of disposable income, it will be easy for you to do so. But for youths, who are dependent on their monthly salary, taking a home loan on EMIs could become a massive, endless trap! Yes! Economically also, buying a home on EMIs may not make sense in the long run. In fact, the numbers may shock you as well. Take a look: 

The underlying assumption here is that your monthly salary is in the Rs 50,000-Rs 60,000 bracket. You are living in a rented apartment that costs you Rs 15,000/month in Delhi-NCR. 

The best home loan rates being offered by several banks right now are in the bracket of 8.5 to 9.9%. In Delhi-NCR, the average minimum price at which middle income groups can buy a 2 BHK flat is around Rs 30 lakh. Add to this, costs like stamp duty, registration, municipal taxes and maintenance. The extra cost would likely be at least 10% of the price of the home. 

Now, if you take a home loan of Rs 30 lakh on an EMI extending up to 20 years, you will have to pay Rs 28,062 every month till the end of the tenure at an interest rate of 9.55% being offered by, let us say, SBI now. This means, you will end up paying around Rs 28,062 x 12x20 = Rs 67,34,871 to the bank. This is more than double the price at which you have purchased the house.   

Two strong arguments, apart from many, bank representatives make to persuade customers to buy a home on EMI are: First, home loan principal and interest repayment fetch attractive tax breaks. Second, amount paid to the landlord doesn't earn any interest. These are true but there are other financial instruments available for tax breaks and earn interest. There is a counter to the second argument also. 

Say for example, you stay in a rented apartment. At the rate of Rs 15,000 per month you will end up paying Rs 36,00,000 to the land lord in 20years. (This amount may go up slightly over a period of time as landlords revise the rent almost after every 2 years in Delhi-NCR.) By taking a home loan, the final sum you were to pay the bank was Rs 67,34,871. This means, by living in a rented house, you could have saved, Rs 67,34,871-Rs 36,00,000= Rs 31,34,871. There are several safe investment options that can help you grow this amount up to four times. For example, check here

By living in a rented house, you can get richer by over Rs 1 crore and also get tax break on at least Rs 1,50,000 per year as per the Income Tax Act (Rs 30 lakh in 20 years!).

It is possible that the value of your home may grow over four times in 20 years. But considering the prevalent middle-income population of the country, would you be able to find a buyer interested in your home at such an inflated cost whenever you want? If you move to another place after a few years, you may like to put the house on rent. The rent money you will receive would compensate for your own rent but you will still be paying to the bank! 

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Safest Investment options

You can put your money in Public Provident Fund and Fixed Deposits. If you are interested in getting regular money after retirement, you can invest in National Pension System. By investing just Rs 20,000/month in mutual funds, you can become a crorepati in just 15 years, according to experts. Check here. 

So, Buy or rent? The ultimate answer would be yours. But before making any purchase, it is advisable to do full research. One way you can end up paying less to the bank in lieu of home loan is to have a reduced loan tenure. This will increase the EMI. Post loan sanction, you can get the tenure reduced by paying more that just EMIs. In the initial few years, if you manage to give all your additional income to the bank against the home loan, you may manage to reduce the tenure by a few years. But still, you will pay a good amount to the bank. 

* Home Loan EMI calculation based on SBI Home Loan EMI Calculator