In India, owning a home is often seen as a symbol of success, security and stability or a status symbol that can bring acceptance and recognition within a community. It is generally accepted that owning a primary residence where you can spend time with your family and feel at ease is important. In fact, people tend to have an emotional attachment to their homes. On the other had, some financial experts argue that though owning a home gives you a psychological satisfaction, it is a poor financial decision and that renting can lead to greater wealth creation. This has given rise to a lot of discussion about whether it is better to buy a home or rent one. However, it is essential to realize that each person has unique characteristics, thoughts and priorities. What might be comfortable for one person may not be the same for another. While some people may feel content living in a rented place for their entire lives, others may experience anxiety and vulnerability in such a situation. For them, owning a home can provide a sense of security and stability that is irreplaceable. This article discusses the factors that any person must consider before deciding on whether to purchase or rent a home and provides valuable tips for better decision making in this respect. Read on to know all details!
Arguments that favour renting a house:
A home is a piece of real estate that we own and spend time with our loved ones. The crucial factor is spending quality time with the family and not home ownership. However, TV commercials and magazine advertisements by banks and financial institutions have instilled in us the idea of homeownership by showcasing a happy family living contentedly in a house purchased through the institution's housing loan. These kinds of advertisements and the influence of relatives and friends who own homes create a desire for homeownership and the ideal lifestyle that comes with it, but it is necessary to consider the multitude of expenses and challenges that come with owning a home.
Let us look at the challenges that are associated with owning a home:
Argument 1#: High initial cost
A house is a large ticket purchase which needs to be sponsored by either one's previous savings or taking a housing loan. Accumulating enough savings to cover the entire cost of purchase of a house can be challenging and may demand several years of consistent and dedicated saving. In the past, it was common for home buyers to be in their 50s and they often had to withdraw from their provident fund to purchase their dream home. However, times have changed and younger individuals are now making up the majority of home buyers in India. The availability of easy financing options and the increasing number of dual-income households, where both spouses are employed, has resulted in younger individuals opting to purchase their own homes. Individuals or couples who opt for home loan are required to pay a down payment of up to 25 percent of the cost of the home. Assuming that your dream house costs ₹1 crore, you would need to pay ₹25 lakhs as a down payment. Even if you are able to save ₹50,000 per month, it would still take you over 4 years to accumulate the down payment amount. Additionally, you also need to consider factors such as inflation and the possibility of real estate prices increasing by the time you save enough money to make the purchase . Thus, owning a home demands a significant amount of capital, whether one decides to take out a loan or intends to pay the entire purchase cost in full.
Argument 2#: Interior design and furniture costs
When an individual or a family decides to purchase a new home, it's easy to get caught up in the excitement and forget to take into account additional expenses such as stamp duty and registration fees, interior design and cost of furniture and appliances. Failing to include these costs in your budget could result in overspending or settling for a less comfortable or desirable living space. It's important to keep in mind that the cost of interiors can range anywhere between 15 to 30 percent of the total cost of the home. While these expenses do not increase the monetary value of the home, they are still essential costs that need to be considered.
Argument 3#: Recurring expenses
Home ownership entails additional responsibilities including ongoing repairs and maintenance costs, property tax payments and insurance premiums. These expenses, similar to the interior design costs, are associated with owning a home. In contrast, if you live in a rented property, most of these expenses are borne by the landlord and all you have to pay is the rent. While repair and maintenance costs may be lower when a house is new, these expenses could increase significantly over time. Therefore, it is important to save separately for home renovation costs. Renting an apartment can thus be beneficial because you do not have to worry about these expenses.
Argument 4#: Limited mobility
For young professionals or couples who are at the beginning of their careers, it's important to realize that purchasing a home could limit their mobility. If you have plans to look for better job opportunities in another city or country, it might be wiser to rent instead of buying a new home. Buying a home is suitable for individuals who are settled into their jobs and are confident that they will remain in the same location for a long period of time, perhaps 15-20 years.
Besides, if one has already purchased a house, it might be challenging to pursue better job opportunities in other locations. Even if you decide to sell your house if the need arises to change cities, selling a house is not an easy task and may take considerable time to find a buyer willing to pay the right price, which is also dependent on the prevailing economic conditions.
Argument 5#: High monthly outflow
Purchasing a house on equated monthly instalments (EMI) requires monthly payments of a significant amount. For example, if you purchase a house worth ₹ 1 crore and take a loan of ₹75 lakhs at an interest rate of 8.50% for a tenure of 20 years, you would have to pay an EMI of ₹65,087 which is a substantial amount. In comparison, the rental yield for a house worth ₹1 crore is around 3.5%, which means that if one opts for renting a house, the rent would be around ₹30,000. Thus, the EMI payments are more than double the amount you would pay as rent.
Argument 6#: High interest payment and opportunity cost
When you take a home loan, the EMI consists of two components: interest and repayment towards the principal. In the initial stages, the interest component is higher, but it decreases gradually as the outstanding principal amount reduces.
Continuing the above example, when you have repaid the loan of ₹ 75 lakh at the end of 20 years, the total amount paid to the bank or financial institution would be ₹ 1.56 crore, which would include a total interest component of ₹ 81.2 lakh. The total cost of your house will therefore be 1.81 crore plus stamp duty and registration fees and other charges.
On the other hand, if you had opted to rent a house, with a monthly rent of ₹ 30,000 and an annual increase of 5%, you would have paid a total rent of approximately ₹ 1.2 crore over a 20-year period. Additionally, you could have invested the ₹ 25 lakhs that would have been used for the down payment. Assuming a conservative rate of return of 8%, this investment would have grown to ₹ 1.17 crore over the same period. In total, you pay ₹ 3 lakhs (1.2 crore rent minus 1.17 crore of investment) by renting as compared to ₹1.81 crore that would have to be paid for purchasing the house. Further you could also invest the difference between EMI and rent, which would compound and create a significant corpus over 20 years and thus help you achieve your other life goals such as retirement, kids' education or vacations. It's thus important to consider this opportunity cost when making a decision about buying a home.
Argument 7#: Low liquidity and unclear pricing
House is an illiquid asset. If you are forced to sell your house due to unforeseen circumstances, finding a buyer who is willing to pay the right price can be a time-consuming process that may take several months. If you are in a hurry to sell the house, potential buyers may use this as an opportunity to negotiate a lower price than what the property is actually worth. Moreover, determining the market price of a property is a challenging task. Even if you hire a professional valuer, there is no guarantee that the estimated value would be accurate. This lack of transparency in pricing makes it difficult to ascertain the actual worth of the house.
These were some of the arguments in favour of renting instead of buying a house. However, before you cancel your plans of buying your dream house, let us discuss the advantages that come with owning a house.
Arguments that favour buying a house:
Argument 1#: Security and peace of mind
Having a self owned house offers a level of security that cannot be achieved in a rented accommodation. In a rented house, there is always a concern about lease renewal or the possibility of the landlord terminating the lease agreement prematurely. However, in a self-owned house, these worries are eliminated and the family can enjoy the comfort of knowing they have a permanent roof over their heads. Owning a house can thus provide a sense of stability to families who have decided on the place where they are going to stay for the rest of their lives.
Argument 2#: Self esteem and pride
Owning a house brings a sense of accomplishment and pride to homeowners, as it is a major milestone in their lives. In addition to the emotional benefits, homeownership also provides a higher social status in society than renting a home. This sense of achievement and higher social status contributes to increased levels of self-esteem and a greater sense of control over one's life. It means that owning a home gives individuals a sense of being in charge of their own lives, rather than feeling helpless and at the mercy of external factors such as fate or the actions of others. This feeling of control can contribute to a greater sense of well-being and satisfaction with life.
Argument 3#: Capital appreciation
Although the internet and financial newspapers offer conflicting advice, the fact remains that property always appreciates in the long run, providing excellent risk-adjusted returns as an asset class all over the world. While investment in other instruments can also yield comparable or better returns, the intrinsic value that a self-owned home holds for an end-user is unique, especially in India where home ownership provides pride and security. Real estate is a performing asset that can generate rental income or provide freedom from rental expenses while gaining value. If you spend time understanding the real estate market and time your purchase well, you have the potential to earn substantial capital appreciation on your house property over the long term and can create a legacy for your future generations.
Argument 4#: Tax benefits
Under the Income Tax Act, if you have availed of a housing loan, you are eligible for certain tax benefits. These benefits can be claimed for both the repayment of the principal amount and the payment of interest on the loan. The interest portion of the EMI paid for the year can be claimed as a deduction from your total income up to a maximum of ₹ 2 lakhs under Section 24 of the Income Tax Act. If you have purchased an under-construction property and have started paying the EMIs, you are only eligible to claim interest on the home loan as a deduction upon completion of construction of the property. You can claim this pre-construction interest deduction in five equal instalments from the year the property is acquired or construction is completed, in addition to the deduction you are otherwise eligible for from your house property income. However, the maximum eligibility for deduction remains capped at ₹ 2 lakh. You can claim a deduction on the principal portion of your EMI paid during the year under section 80C of the Income Tax Act up to ₹ 1.50 lakhs. You can also claim a deduction for the stamp duty and registration charges under Section 80C, within the overall limit of ₹ 1.50 lakhs. However, this deduction can only be claimed in the year in which these expenses are incurred.
Argument 5#: Possibility of generating passive income
When you own a house generating passive income becomes possible by renting out a portion or the entire house to tenants, or by providing home-stay services to tourists via vacation rental platforms such as Airbnb.
Argument 6#: Freedom to make modifications
If you rent a house, the rental agreement typically contains clauses that prohibit you from making any alterations or modifications to the property, which may include something as simple as hammering a nail into the wall to hang a picture frame. On the other hand, owning a home gives you the freedom to make modifications as per your changing requirements and preferences. Whether you want to renovate the house or change the wall colours, you have the flexibility to make changes without any restrictions or permissions required from a landlord.
How should you decide whether to buy or rent?
Your home is not merely a physical structure where you reside, but a place where you experience life and create cherished memories. It serves as the focal point of your entire ecosystem and provides a strong foundation for you and your family. While it's reasonable to buy a house to reside in, it's usually unwise to buy one as an investment. Therefore, it can be said that there is no definitive answer to whether you should buy a house or rent one. The ultimate decision depends on personal preferences and priorities. If stability and security are important to you, buying a house may be the right decision. On the other hand, if you prioritise high returns on investment, it may be more beneficial to rent a house and invest the additional money to generate higher returns.
If owning a house is your priority, here are some tips to achieve this goal:
#1. When borrowing to buy a house, it is critical to only borrow an amount that you can comfortably repay. As a rule of thumb, your home loan EMI should not exceed 30% of your current income. If a significant portion of your income is already being used to pay EMIs, any unforeseen financial emergency could result in missed EMI payments and mental stress. In such a situation, delaying the purchase of a home until your income increases and you reach a stage where you can afford EMI payments that do not exceed one-third of your monthly income would be a wise decision. You should also remember to include additional costs such as stamp duty, municipality fees and interior design expenses when calculating your loan requirement. If your dream home is beyond your budget, consider downsizing your expectations.
#2. Saving for the down payment is often the biggest challenge when buying a house. Aim to save at least 25 percent of the purchase price of the house, taking inflation into account. Ideally, start investing towards the down payment at least five years in advance. For longer time frames, a good multi-cap fund can be a good option, while for shorter time frames, consider hybrid funds based on your risk appetite. Equity-savings funds may be the best option for those who cannot afford to fall short in five years.
#3. Location is a critical factor when choosing a home. Consider settling down in your career and deciding on the city you want to live in before buying your first home. Renting a residence and paying an EMI on another property can be costly. Location also affects the potential returns from your investment.
#4. Finally, get a plain term-insurance plan that covers your outstanding loan as soon as you take a home loan. This ensures that in the event of an unfortunate incident, your spouse or nominee will receive a death benefit equal to the outstanding loan amount, freeing them from the burden of EMIs.
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