EMI vs Rent: CONFUSION CLEARED! Should you buy flat, house with home loan or avoid paying EMIs?

The perception of settling down has always been allied with buying a house. And, coronavirus-caused Covid-19 pandemic has ironically inched people closer to wanting to own a home. The sense of security and pride in home ownership is unparalleled. That compared with the burden of paying rent every month certainly makes buying a much more appealing option. But how/when does one know the right time for buying a property is really the crux of the matter. Owning a house is a wonderful proposition but it strongly hinges on financial readiness of the buyer. Saurabh Garg, Co-founder and Chief Business Officer of NoBroker.com, explains EMI Vs Rent options and which is the best option for home seekers:-

Prospective buyer’s perspective

Buying a home is every Indian’s dream. Millennials are increasingly inquiring about homeownership especially now that they are 6 months deep into the “work from home” environment. NoBroker data indicates that over 65% tenants are looking to buy a home within the next 3 months.

The shift in interest can be attributed to multiple favorable reasons. One, people can get loans at record-low interest rates. Thanks to RBI for reducing the repo rate, which has resulted in home loan rates dropping to sub-7% levels, which otherwise was in the range of 8-9% a year ago.

Two, developers are selling their unsold units at a much lower price at the moment in order to ensure business continuity. Buyers can thus go for a wide array of options within their budget (especially the ready-to-move-in properties) where they can just shift and start living instead of waiting for months that usually happens in case of under construction projects.

Further, the pandemic has also changed the mindsets of people about owning a home. While it was a luxury a few years back, it has now become a necessity in the current times.

Another factor that makes this time ideal for home buying is the PMAY deadline extension. Yes, the government has further extended the deadline for availing this lucrative benefit another year. It means families earning an annual income between INR 6-18 lacs can avail an interest subsidy of up to INR 2.38 lacs till March 31, 2021. It’s good news for first-time buyers and will give them massive relief in terms of financial stress.

However, the amount of EMI that one would pay monthly on a dream house is way more than the monthly rent, due to variables like size, amenities, location, etc. Moreover, EMIs may saddle you with high interest payments on the loan, and you might sometimes have to compromise on the quality of life. In a situation with 20% down payment and 80% loan,  you will realize that you have ended up paying more interest to the bank than the cost of the loan itself.  

Simply put, living in a rented apartment doesn’t overburden you with a higher liability of paying EMI. On top of that, you always have a choice to change locations and shift to an area that is suitable for you in terms of distance from the office, hospitals, malls, etc. Also, you will be able to afford to live in high-value apartments at comparatively low rents, and hence renting naturally becomes a preferable choice, until a certain point.

Understanding the math of paying EMI Vs. Rent

The key differentiator is always affordability. When you buy a house with a loan, you are already aware of the EMI required to be paid over the long term. Let us consider an example of a real estate property in Bangalore. Suppose its present market valuation is around INR 50 lakhs. Here’s how the decision unfolds if one takes a decision to buy or rent this property –

Rent Scenario: If one decides to live in this property on rent, the immediate cost to the tenant will be approximately INR 12,000-14,000 per month. This cost will increase after 11 months. Therefore, a person may have to shift to a different location every year to maintain the rental or bear the hike of about 5-10% YOY. Of course, salaries will increase as well, but then, let’s also factor in inflation.

Buying scenario: When home is purchased on home loan (20% down-payment, 80% Loan), it will cost Rs.32,000 per month as EMI (@7.25% for 20 years). And if you can pay 50% as down-payment then EMI would be around 20,000 only.

Also, in this scenario the individual does not have to worry about the property price going higher as the cost remains same for the entire tenure despite the appreciation value of the property.

Conclusion

No doubt, renting comes with its own set of benefits like flexibility and lower monthly payments. Renting has its benefits- flexibility to change where you live, HRA, better house for lesser monthly expense, etc. On the other hand, buying a home gives a sense of satisfaction and pride of ownership. And your EMIs are building an asset for you. It provides more satisfaction, but only when done at the right time. Buying is an important milestone but one must be prepared for it, save for it. Else one might have to compromise on the quality of life due to heavy EMIs. The right time to purchase is when