January 30 , 2013
Whether to buy property or live on rent is a constant worldwide question. For many people owning house is attractive to their sentiments but is unfavourable considering finances. A house owner does not have to worry about unstable landlords or look for houses at the end of the lease period and can have interior design of his taste.
The important costs of owning a house include down payments, loan charges, principle and interest. Apart from these there are other costs that cannot be ignored which include periodic maintenance, property tax and may be insurance. Below we list popular reasons in favour of buying and even renting and try to guide you on how to arrive at the decision for you and your family.
Why buying a house is favoured
Some people consider buying a house as more of an investment than as a need. For first time buyers this may not be the case. Change in the value of property may not matter to them as much as it does to the former category. Property prices should ideally appreciate at similar rates as rent does but in many localities it does at a much higher rate.
A loan term may last for 20 to 30 years. But you know that eventually there will be an end to the EMIs after which you will be liability-free. For most people having a stress-free retired life is the greatest incentive to buy instead of living on rent the entire life. With rise in life expectancy people can stay longer in their house without paying rent. Rent rates rise at the rate of inflation and depending on locations, even more than inflation.
Why renting a house is favoured
The best benefit of renting instead of buying is you have to chalk out lesser amount of money each month. The amount that is saved can be invested in other high yielding securities as equities, for the long term. By the time the others are over with their EMI you could buy multiple flats. Many people think of EMIs paid as investment they're making to own the house. But it must not be forgotten that not all of it is an investment, interest being paid is never recovered.
If your house is not owned you don't have to spend money and time on maintenance and renovation. People staying on rent spend relatively less amount on furnishing as well. You also don't have to bother about closing costs which include repairing and maintenance.
How to decide what's best
Most importantly buying vs renting decision should be based on whether it is cheaper to buy or rent at a given place at a given time. Buying and renting rates differ widely in different real estate markets. If you take Delhi to be a real estate market there are submarkets within Delhi where buying is cheaper than renting and others where the opposite is true. You can refer to Makaan.com Buy vs Rent Index (MRBI) for guidance. A score of less than 20 for a locality indicates it is cheaper to buy than rent in that place. A score of 21-25 would be neutral and score over 25 indicates it is cheaper to rent than buy property in the locality.
Generally speaking if you can pay EMIs and other ownership charges at similar rate of rent then it is an indication of low property rates. If you buy property when it is overpriced it would take about 6-8 years just to get back on sale the price you had paid.
If you conclude it is cheaper to buy property at a locality than to stay there on rent, go on to consider the following factors:
1. How long you will stay?
In general if you will stay in a place for at least 6-7 years you could consider buying a house. If you're in the place on a company transfer and won't stay for more than 5-6 six years renting a house might be best. This is because the cost structure, stamp duty, etc. in the purchase of a flat are so high that it takes almost 5-6 years for a house to break even on a sale.
2. Down payment and Closing costs
Lenders offer home loan up to the extent that EMIs do not exceed 50% of your monthly income. Although you may be eligible for a big enough home loan you need to bring up 20-25% of the cost of the house upfront. You must take into account all your liabilities. If you have other loans more caution is needed. It is highly advisable to ensure your total annual debt outflow (all possible loans, credit card debt included) does not exceed 50% of your annual income. This will leave enough amount to spare for your household expenses and long term savings.
Similarly you have to pay closing costs on the loan, which typically are fees charged by those involved in the sale including the lending bank, government, surveyor, real estate agent and so on. You can expect this to range from 4-6% of the loan.
3. Investment avenues
How is the money that you will save on EMIs (by staying on rent) going to be used? If you intend to invest in a bank fixed deposit, buying a house may be a better option because residential property returns are higher than that from debt securities in the long term. However if you intend to invest in equities living in a rented place may be a better idea. Nothing beats inflation better than stocks in the long term. If you can wait, after a couple of years, you might have earned from equities enough money to buy several flats in the same locality.
4. Job security
Before you decide to buy a house on loan have the assurance that your job is secure, your company and especially the industry you belong to are not going to drown in at least 20 years. Usually people who own a house are more reluctant to relocate to other locations than others who don't. So it will be safer if you know you will have some surplus cash to pay EMIs without defaulting.