A home is much more than just four walls and a roof. It kindles a range of emotions and thoughts in us. To some, it is a sense of security; to some, it is about comfort and to others, it is a symbol of status and accomplishment. But there is also the other aspect of a home to contend with. It is to do with numbers. The monetary aspect too is important as buying a home is often the biggest financial transaction in an average Indian’s life. To rent or buy is a decision that many grapple with.
The Numbers Argument
While the above arguments in favour of home purchase are all qualitative, there is also the quantitative angle to the rent or buy argument. How do the two options stack up purely based on numbers? Here is a look:
Consider the example of Sanjay, 25. There are two scenarios considered here. One, he buys a house right away at the age of 25 when he has just settled into his permanent job. The other scenario is that he continues to stay in rented accommodation and invests his savings in a bank deposit at 8% interest. The initial value of the home is taken as Rs.40 lakh in both cases. For the purchase of a home, he takes a loan of Rs.30 lakh with a term of 25 years. Here’s how his finances would have stacked up in the two scenarios at age 50 when he has paid up his loan in full. The interest rate on the loan is assumed at 9%.
|Scenario of Rented home|
|Annual rent paid in the first year(assumed at 3% of the home value)||Rs.1.20 lakh|
|Annual increase in rent(also considering the periodic resets in rental valuations)||10%|
|Total rent paid for 25 years (accounting for the annual increases) (A)||Rs.118 lakh|
|Value of his savings assuming the loan down payment of Rs.10 lakh and the notional EMI (Rs 25,176) are invested in deposit @ 8% for 25 years (B)||Rs.313 lakh|
|His wealth at the age of 50 will be (B-A)||Rs.195 lakh|
|Scenario of purchased home|
|Present value of home||Rs.40 lakh|
|Loan availed for purchase||Rs.30 lakh|
|EMI on loan(@ 9% interest and tenure of 25 years)||Rs.25,176|
|Total of EMIs paid in 25 years (C)||Rs.76 lakh|
|Value of Rs.10 lakh down payment @ 8% p.a after 25 years (D)||Rs.69 lakh|
|Total cost of home (E=C+D)||Rs.145 lakh|
|Value of home after 25 years considering 10% per annum appreciation (F)||Rs.433 lakh|
|His wealth at the age of 50 will be (F-E)||Rs.288 lakh|
Note:taxation has been ignored in both scenarios for the sake of simplicity.
It becomes obvious through the above example, that buying a home makes financial / economic sense too. Sanjay is left nearly Rs.1 crore richer if he opts to buy a home rather than live on rent. This is no doubt a huge difference to his wealth. Considering that home loans fetch tax benefits too, the real difference in the wealth is likely to be higher.
Whichever way you look at the question of “rent or buy”, buying makes eminent sense. With improved affordability due to a surge in income levels, higher disposable incomes, availability of easy and innovative loan options and tax incentives, a home purchase appears as an attractive proposition.
Also Read - What is Home Loan
Also Read - Home Loan Process