Renting Vs Buying A Home: Buying a house is often seen as a better financial move because you eventually own the property. But that’s not always the case. In some situations, renting can cost less and may also leave you with more money to invest.
The choice depends on several things. Property prices, rent in the area, home loan rates, income, how long you plan to stay and what you could earn by investing your money all matter. Recent home loan data in India also shows that interest rates can vary a lot between lenders and borrowers.
According to Sarika Shetty, CEO and co-founder of RentenPe, the calculation should look at the full cost of owning a house and compare it with rent and the investment opportunity from the money that isn’t spent on buying.
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Take a house that costs Rs 1 crore. Suppose the buyer pays 20% upfront, which means Rs 20 lakh. The remaining Rs 80 lakh is taken as a 20-year home loan at an illustrative 8.5% interest rate.
The monthly EMI would be around Rs 69,400. Over 20 years, the buyer would pay about Rs 1.67 crore through EMIs. Around Rs 87 lakh of this amount would be interest. Once the Rs 20 lakh down payment is added, the direct cost reaches nearly Rs 1.87 crore.
That’s still not the full ownership cost. Stamp duty, registration, property tax, repairs and regular maintenance would come on top of it.
Now look at the same house as a rental. If the yearly rent starts at Rs 3 lakh, the monthly rent would be Rs 25,000. Even with rent going up by 5% every year, the total rent paid over 20 years would be around Rs 99 lakh.
“Now consider the same property as a rental. If the initial annual rent is Rs 3.0 lakh, equivalent to a 3 per cent rental yield, the starting monthly rent would be Rs 25,000. Even assuming rent rises by 5 per cent annually, the cumulative rent paid over 20 years would be roughly Rs 99 lakh. This is significantly lower than the Rs 1.87 crore paid towards the purchase through the down payment and loan,” Shetty said.
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The buying calculation can’t stop at the money spent. The buyer also gets an asset after paying off the loan. If the Rs 1 crore property grows by 5% every year, it could be worth about Rs 2.65 crore after 20 years. At the same time, the person who rents can invest the money that wasn’t used for the down payment.
“For example, if the renter invests the Rs 20 lakh upfront at an illustrative 10 per cent annual return, it could grow to approximately Rs 1.35 crore over 20 years. Investing even part of the monthly difference between the initial EMI of Rs 69,400 and rent of Rs 25,000 could further increase the accumulated corpus,” she explained. These investment returns are only examples. They aren’t guaranteed.
Buying can work better when income is stable, enough money is available for the down payment and other purchase costs, and the person expects to stay in the home for many years. Buying at a sensible price compared with local rents also matters. Rental yields in Indian residential property commonly remain fairly low, so the price-to-rent gap is important when making this calculation.
Renting can make more financial sense when homes are very expensive compared with their rents, income isn’t stable or a person may move to another city. It also keeps the down payment available for other investments.
“The decision should therefore not be reduced to “rent is an expense, while EMI creates an asset.” An EMI also includes a substantial interest component, while ownership comes with maintenance, taxes and transaction costs. Similarly, rent is not necessarily “money wasted” if it provides flexibility and allows the tenant to invest the capital that would otherwise be locked into a property,” said Shetty.
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