Tamal, an MBA finance working in a private bank, smiled at his psychology professor wife Mandira when she said, ”It’s time we buy our own flat. I am fed up with changing homes every eleven months, and pieces of my crockery getting broken in the process.”
”Do you think it’s financially wise to buy a flat now, or invest now in a mutual fund for our savings to grow, so that we can easily pay the down payment later even for a larger flat,” asked Tamal, always thinking of the financial angle above everything else.
”Yes, it is. I know that it’s much better to buy a flat now than later, even from the financial angle. And of course, it is not the only consideration.”
”Are you sure?”
”Absolutely sure. In fact, I have already contacted a property consultant to suggest suitable flats within our budget,” declared Mandira.
”Are you not rushing it? After all…”
”The more you wait, the more expensive it is,” said Mandira.
This conversation brings out interesting perspectives about owning a home, but looking purely from a financial perspective, has psychology professor Mandira spoken some words of wisdom that even her MBA finance husband has failed to understand?
Before we discuss the financial angle, let us explore the various pros and cons of buying a home or renting one.
Let’s discuss it threadbare.
Creating the Home of Your Imagination
A home is not only 4 walls and a roof over your head.
It is a place where you come back to after a long day at the office. From the colour of the wall to the craft items on the showcase shelves — everything is a signature of your choice, an extension of your personality.
It takes a lot of effort and time to create your island of tranquility.
How can you devote that effort and time if you have got to change your house after 11 months?
Homeowners are Happier & Enjoy Higher Social Acceptance
Living in a rented house means living in a state of regular house-hunting. Shifting to a different home after a few months means the difficulty of packing and unpacking everything in your home before you settle down properly.
Homeowners feel no such stress and feel happier than the tenants. Owning a house gives a sense of satisfaction and pride. When you are in your own home, no one can threaten you to vacate the property at the end of a rental agreement. This is huge security non-existent in rental properties.
If you are a tenant, you find it difficult to grow social intimacy. Your social acquaintances know that you will leave in a short time, and generally refrain from developing deep bonding.
This even affects the kids as they have to constantly break from old friends and develop new ones. Emotional stress is often painful and kids develop behavioural issues.
Being a homeowner is always more acceptable to your social circle, neighbours, and community than being a tenant.
However, buying a home has various financial implications. It is not only about an investment to get higher returns but, of course, your own home is likely to give higher financial benefits than staying on rent.
We will now see the implications of buying a home vs renting one in purely financial terms.
What is Financially Smart — Buying or Renting?
Let’s look at different scenarios to understand the financial difference between buying a home and renting one.
Let’s imagine you are taking a home on rent:
Cost of home: Rs 60 lakh
Rental yield Rs @3% (Rental yield in India is about 2.5-3%): Rs 1.80 lakh
Let’s consider that this is the annual rent payable. In that case, your monthly rent: Rs 15,000
If the annual rent increases by 10%, then the total rent paid in 15 years: Rs 57.20 lakh
This is your total outgo if you stay on rent for 15 years. Now we will see your cost if you buy the same property on a home loan.
Cost of home: Rs 60 lakh
Stamp duty charges in Kolkata @4% (2% reduction now, normally 6%): Rs 2.4 lakh
Property registration charges @1.1%: Rs 66,000
For the home loan, let’s assume that the LTV ratio is 80%.
Therefore, the down payment: Rs 12 lakh
Loan amount: Rs 48 lakh
Assumed Home Loan interest rate: 8% p.a
Home Loan tenure: 15 years
Total payable in 15 years: Rs 82.56 lakh
Expected EMI: Rs 45,871
Now, let us assume that the annual appreciation for the property is a conservative 8%.
In that case, after 15 years, the value of the property is a whopping Rs 1.90 cr.
It is clear that paying somewhat more on a home loan is more than matched by the rise in property prices.
In case you had rather invested that down payment lump sum of Rs 12 lakh in equity mutual funds for 15 years, a corpus of around Rs 65.68 lakh would have been accumulated, assuming a conservative 12% p.a. returns.
The total cost of acquisition of your home is equal to the stamp duty + registration charge + home loan repayment + value of down payment after 15 years.
Rs 2.40 lakh + Rs 0.66 lakh + Rs 82.56 lakh + Rs 65.68 lakh = Rs 1.51 cr.
Your gain = property value after 15 years – your investment
Your gain = Rs 1.90 cr – Rs 1.51 cr = Rs 39 lakh
Your Home is an Asset
The real estate market swings from time to time. But property is a unique asset class, which offers unmatched returns in the long run. If you ever need cash, you can sell the property, rent it out, or take a loan against the property to meet your needs.
If you rent a flat your monthly rent does not give you ownership of the property. Conversely, if you can pay a little more down payment, your EMI will be close to the monthly rent you pay. If you add the tax benefits of taking a home loan, paying EMI is usually smarter than paying rent.
If you consider the brokerage fee and the cost of shifting you pay every time you rent a new flat, you will notice that your rent and EMI will be close.
In that sense, buying a home paying EMI is better because, at the end of the repayment period, you will be the proud owner of the asset.
In the present scenario, benign home loan interest rates, concessional stamp duty charges on offer from various state governments, and higher tax benefits certainly make a strong case for one to own a home with the help of a home loan, if financially ready and capable of making the repayments.