Buy or Rent a House?

The ultimate goal for most of the lower middle-class and middle-class families is to live in their own house. But considering the ever-escalating property prices, rising and fluctuating interest rates, long tenure of loan repayment schedule and uncertainty in connection with jobs and income, at times we would wonder if it is all worth the trouble.

The pros and cons of this dilemma, whether to go for an own house on loan or to live in a rented place, is discussed in this column:

Venkat is 31years old, recently married and is in search for an apartment. He and his wife liked a two-bedroom apartment costing Rs.30 lakh and they decide to approach a housing financial institution (HFI) for a loan.
The HFI’s terms were – loan value of 80 per cent of the property (Rs.24 lakh), rate of interest at 11 per cent (floating rate), and a loan tenure of 20 years (EMI of Rs. 24,773).

The EMI commitment was almost 50 per cent of his current net income which got Venkat worried. He calculated the total interest and principal outflow over the scheduled 20 years of the loan repayment period and was stunned to see the figures – Rs.59,45,520 (Rs.24,773 x 12 months x 20 years). He would have to pay Rs.35,45,520 towards interest alone!

One of the alternative options he considered was to continue to live in a rented place by avoiding living in an own house, thereby also avoiding taking a loan. The rent for their current house was Rs.8,500 p.m. and the annual rental hike as per the agreement with the landlord was at five per cent.

Even if he considered the rent as his expense over the next 20 years, his outflow would be Rs.33.80 lakh (including five per cent year-on-year increase in the rent). Instead of taking a loan and paying Rs.25,000 as EMI for 20 years, if he continues to stay in a rented house, pay the rent of Rs.8,500 and invest the rest (Rs.16,500) in such opportunities that can give him a compounded return of 12 per cent p.a. he could create a corpus of Rs.1.65 crore.

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Read more at Source: The Hindu