Shekar had just shifted to Pune and met his long lost friend Manish at the local café. While discussing their personal life, Shekar asked Manish about his house rent. Manish said he was paying Rs 16500/- for a two BHK flat just on the edge of the city.
Shekar who had come from a smaller town was shocked that someone could pay so much as rent. He wondered aloud that Manish was doing a foolish thing to pay rent to someone else, why not pay the same amount as EMI and get a home loan. Over a period, the home would be yours- Shekar proclaimed. This got Manish thinking!
Why should I pay my landlord? Why not get a home loan, spend the same rent amount, and be the owner of the house?
However, Manish being the very mature person that he was, decided to test this with his mentors. He went to five of them and asked them to give one reason why he should not think of exchanging his monthly rental with an EMI? They said…
The “INTEREST”ing part
His father advised Manish that he personally had not taken a home- loan in lieu of staying on rent, as he could not digest giving his hard-earned money to a financial institution as interest. Manish countered this by saying that he was instead giving his hard-earned money to his landlord. To this, his father replied “true, but I have also simultaneously saved more money by staying on rent in a smaller house and will use that cash to buy a house outright” On buying a house worth 30 lakhs I would end up paying Rs 28 lakhs as interest to the bank over a period of 15 years (even at a low interest rate of 10% per annum), why should I do that? Manish now had one reason to rethink his idea.
What if you get posted to another city?
When he asked his colleague Angel the same question, she asked him what his career aspirations were. He said he wanted to be the Country Manager of his company in the next few years. Angel said that his aspirations itself were an answer to his question. If he got posted out of the city he will have to take a new house on rent in the new place and also pay the EMI for the old house. Although he could save some part of his EMI by renting out his “own” house, it was very rare that he would get the same or higher amount as rent. The risk of defacement, poor maintenance, irregular rent payments etc too was there to think of. Manish now had a second reason to rethink.
What happens when your family grows?
Manish asked his wife the same question. She replied saying that they were now only 3 of them (Manish, his wife and 2 year old kid). But they were planning to have one more kid. With four of them and regular visitors they would need a 3 or 4 bedroom house. But, if he takes a 2 BHK on loan, then he would be stuck with it for at least 15 years. With a rented home he could always move to a bigger house when needed!
It does not always end at the same rental amount
Manish decided to ask someone who had done the same thing (shifting rent to EMI). He spoke to Ajay, his boss. Ajay said that when he was on rent he used to pay 12000. But when he took a house he took it on an EMI of 22000 as the houses available at 12000 EMI were small and his wife kept saying that “it’s a onetime investment so let’s go for the biggest house possible”. This thought made them buy a house with a loan EMI that was almost twice the rent! From that day on Ajay had to be very frugal with his life style.
What if you lose your job/get a salary cut due to recession
Manish still thought he needed a strong reason. He went to his financial planner and told him all the reasons given by his advisors. His planner added to the list asking “what if you lost your source of income- how would you repay your EMI?”
Manish countered saying why should he worry about things like extra rooms, losing income or being posted out of town, as he could always sell his “asset” – the house! To this, his planner replied that Manish would have to understand that the house will not be his until the end of the last EMI and hence it was a myth to think of it as an asset.
Also, if he had to sell the house under urgency he would not get a good rate. His asset appreciation would be comparatively lesser as his principal would have reduced by minimal amounts in the first 5-6 years. To this he would have to add the broker charges, registration fees, pre-closure charges etc. Thus gaining very less for all the trouble.
Oh my god! I pay so much and yet I do not own the house! Manish now had very strong second thoughts of replacing his rent with a home loan EMI. Rather he decided to move to a cheaper rental home and invest the surplus in a “buy a house on a high down-payment fund” to raise at least 50% of the loan amount before going for a house.
NOT ONLY MAGNIFICIENT : CONSTRUCTIVE TOO!
Good article. But it requires very disciplined and prudent saving and get very good return on these savings to build corpus of 50% own contribution. Again by the time one accumulates the "50% high-down payment fund" what is the guarantee the asset prices wont appreciate and the 50% is equal to only 20-30% own contribution? Then the race is on to build further 20% — and so on. At this rate a common wont be able to acquire a own house if he wants to. Else there is no harm of staying on in a rented house lifelong – one needs to just forgo the thought and emotions associated with thoughts of "Own house". In fact there is no real meaning to "own house" as in a Cooperative housing society environment these days I am not sure if one really owns his house and enjoys the freedom!!
Absolutely agree with ur comment and the article
Have a proper evaluation of "what 50% corpus means".
It is one's projection of ability to set aside savings;
NOT setting the asset appreciation, sad to say so !
Means you cannot overproject your earning curve,
No matter where you can get that same value property,
Your corpus gets fixed, not the place 🙂
This is what my parents in hyderabad did. We buy things only when needed and save surplus money. We never had problem with money. Thanks to my parents.
And with the Supreme Court drafting a Rent Agreement wherein the tenant will not be evicted before 5 years, it may make more sense to many.
foolish advisors for manish…….u can never save enough money in this world to buy a flat / house outright in a good city. Buying a house, even if u have to stretch a little , is the best option than paying rent, unless you already have property elsewhere or you are sure will not stay there for even one year .
Property prices will always grow and with inflation and decreasing value of money…..ur house value apprecation will always beat any other investment. Dump your fear, and have some courage and go and buy a flat of your choice…..just see the legal and technical approvals are in place and the builder is good.
People around the world belive that property prices will always move to northern direction, but the recent recession occured when property prices come down to south first in US (the country in which most of the people wants to settle down) then other part of the world.
Just divide the area of India by its population you will amaze to see what is the per capital sq. mts of land we as Indians owns ( Remember we are second most populated country in the world), so at least for the time being land is not a problem.
So invest wisely there are other assets classes which gives much higher returns than real estate.
foolish advisors for manish…….u can never save enough money in this world to buy a flat / house outright in a good city. Buying a house, even if u have to stretch a little , is the best option than paying rent, unless you already have property elsewhere or you are sure will not stay there for even one year .
very simple & reasonable article
Seems very funny!!! By the time you save money by not paying EMI, the cost of house would have gone double & you end up paying more for a house. At the same time you have hassle of shifting your house as no person would allow you to stay in his house for long periods.
Invest in Mutual Fund through SIP route he will have more than enough money to buy his dream house in 10 to 15 years time
Most Indians have a deep-seated psychological need to own a house, thanks to Hindi movie dialogues like "apna ek chhota sa ghar ho…".
Financially speaking, it is nonsense. The only case for owning your own house in expensive cities like Mumbai, Delhi, etc., is if you inherit it or if you can somehow pay for it outright without compromising your quality of life. Otherwise, renting is a far better option. Look at the economics: Annual rental values in Mumbai today are approximately 3-5% of the price of the property. That means if you rent a house worth Rs.1 crore, you will pay approx Rs.5 lakhs per year (Rs.40,000 per month) as rent. Whereas if you take a loan of Rs.80 lakhs (assuming 20% down payment), you will pay an EMI of Rs.80,000 per month (assuming 20 year tenure and 10% interest rate). Simple maths!!!! Even better, when you rent, all major repairs and maintenance are taken care of by the landlord!!
All you need to do is to overcome your mental barrier of living in a rented home. And be prepared to shoft once every 3-5 years if required.
good one
D article actually made me think – is there really a need for me to purchase a house? Instead of spendin insane amounts on EMIs n having to travel from one corner of d city to d other for work and other stuff, I can spend on a rented accomodation close to my place of work and save money, time and stress. Again, being transferred to a new city will require a rented accommodation. So having a purchased accommodation wil simply increase d finanacial burden further which cannot be offset even by renting it. Of course the security of owning a house wil not be there. Come to think of it – is a house which i purchase on a 15 year EMI really mine till i pay off d last bit of debt? How can i stay under dat roof for 15 years without d feelin of security? D article has given a very enlightening insight.
Quote "On buying a house worth 30 lakhs I would end up paying Rs 28 lakhs as interest to the bank over a period of 15 years (even at a low interest rate of 10% per annum)"
What do you think the value of the house would be after 15 Years? I guess more than 30+28 Lakhs.
Congratulations to bring out such and investment idea which is out of the box. We inidian investors need to think into the future and embrace such new and innovative investment ideas to create wealth and also to enjoy a life with a lifestyle. Buying a house on EMI and creating a liability of the loan is the old school of thought and Renting a home and enjoying the living and investing the amount in an asset class like equities which beats inflation and interest rate risk is the New School of thought. There is nothing right or wrong , it all depends on ur perception and ur comfort level. Hats off to the IDEA Sirji…………………………….
There is a Pro's and con's as well to manish's story. it doesnot apply for all in all cases. My own example :
bought a house(individual) in hyderaba @8 Lakh, 2004. today, it is costing 35+. Rents were then around 4000+,today @ 8000. ipay a EMI of 6131 and get a rent of 7500.
But if i consider at prices today, i agree with article.
it is wise to buy a house now rather than wait till you accumilate 50% of the principal amount, i had bought a house in 2004 with a bank loan and the value of the property appreciated 500%.If I waited to accumilate instead of a bank loan, I am sure I would not have collected even 20% of the property value. be wise and take a bank loan and buy, property prices in India are never gonna come down with increasing incomes and inflation.
If all decided to stay on rent and not to buy their own home, house rent will shoot up drastically i.e. if u are paying 12000pm, it may go to 18-20000 in a years time as people will be seeking house on rent than to buy a house.
Property prices never comes down. If u are late by say one year, either u have to pay 10-15lacs more for the same house or may have to opt for a another house in a far away localities.
Foolish idea. First you try to own a house or flat, then advance your EMIs and then when your financial position improves, foreclose the loan and become complete owner of the house. Then by selling the house at a higher rate, since the property value has gone up, you take a bigger house and continue to make payment EMIs at your convenient pace. Living on rent is not a good idea at all. No owners are good. Beware.
What great realty advisors we have!!! I bought 1 BHK in 2002 in Vile Parle (E) for 16 lakhs and in 8 years the price of the same flat stands at a whopping 1.25 crores! Can a person in service save enough to fund such a whopping rise in realty prices and at the same time take also the burden of rentals? If we feel so, we are leaving in fools paradise. Stop publishing such foolish and impractical advices giving false hopes to the common people. Manish can and will never buy a house!!!
There are many flaws in this article.Firstly if some one losses her or his job,will he/she have enough money to pay the rent? Landord will ask immediatly to leave the house while if you are staying in your house ,banks do give grace or time to pay the EMI.Secondly number of people to be a family is decided by members only by that if some one want dozen of children then he/she will end up changing home.
And lastly as said by most of the people the inflation rising higher than the Salary hike of people ,how in a world you can possibly save enough money to give the down payment.By this you will never able to have a house
Its an excellent article. As i myself bought a flat which is under construction and i have to pay after every 3-4 months amaount of Rs 2L-to 2.5Lakh I paid the initial amount from my pocket and was trying to get loan from HDFC but due to Personal Gauarantor problem it was held up. then my senior friends guided me and told me that i can borrow some amount from them and save monthly as much possible and pay for my house through my own rather than going for loan. And they were quite right cause i wanted a loan of 6 Lakh for which in 10 years i would pay nearly 3.5 lakhs as interest to bank along with the principal amount of 6lakh. really we should plan and put as much possible from our own pocket. Its a really good article
I stand today on the same line today; whether to continue paying rent of 15000 for an average 2 BHK house with no facilties or go for home loan to buy my dream house. My dream home will cost me 1.5 crores.
Buying home on loan must not be considered as investment. You end up paying double of the house price so the net profit you will earn after 15-20 years will be close to 0.
Yes, you can not wait forever to arrange the 50% down payment as well.
I feel there is no strong point put forth by this article in favor of continue staying on rent.
You must take calculated risks and then earn your own home.
Here is my take on each point:
The “INTEREST”ing part : Take a home loan and continue pre-paying the principle part. Rather than targeting 15-20 years, try to finish the loan within 5-8 years. You can do that by saving any additional money and once you have sufficient amount, just pre-pay part of principle.
What if you get posted to another city?
Yes there is no simple solution to this. You must analyze the nature of your job before buying home. Ideally buy home at your native city. So even if you are not using it now or in future, it is always there for you in your home city.
What happens when your family grows?
Home is not an investment. So you must consider what is a right sized home based on your future requirement. Thats why I said that my dream home will come for 1.5CR. We are just 3 right now.
It does not always end at the same rental amount
Ofcourse not. The real price of your home is :
(EMI + property taxes + maintenance charges) – (rent you are saving + tax saved + peace of mind).
Do not forget maintenance charges and property taxes
What if you lose your job/get a salary cut due to recession
No one is dying jobless in India. Its just the same fear everyone has. Just go for it.
Do not live poor to die rich!
I am not agree with whatever advises given to you either by your father, wife, friend/boss and financial adviser. Just let me know in which investment you are getting more than 50% appreciation from last 5 years?
I have also at same stage when I come out of my family house. At that time, i talked to many for suggestion but finally decided on my own decision i.e. go for buy a house. At that time my income is not good but still i can afford to buy a house even though its smaller than my expectation and at different location.
Now after almost 10 years of purchasing my house, i am getting almost 300% return for that even after removing the EMI that i paid till date. Do you think its possible in any investment.
One thing, who said that you always be on same salary and also who said to you always get a house on rent on same rate. If you see the trend till date of your salary increment and rent increment and cost of living. If you salary increase by 5% till date, then you rented house rent increased every year by 10% at least and beside that cost of living almost 5-8% increased.
So, I think it will be good if you go for buying a house instead of stay in rented house.
Good answers to stay on rent but all to support landlord not for the people who want to buy house.
This way people will not able to buy house as they wish until their death. Except few who get sucess very quickly or won lottery.
I guess this article is right for the second home buyers…..not for the first timers….everyone should have atleast a functional house …not a lavish one…so that they can fall upon it in times of distress…..
I owned a tenement house in August 2008, cost that time was around 12 lacs. My EMI is 9300 and i used to Pay 5000/- as rent. Additional burden came around 4000/-. I decided to 'Own a House' and now after 22 months the house cost is around 25 lacs. More than double – No other investment would had built capital for me like this. I gained appreciation – Tax rebate and Peace of mind to evacuate house after every 11 months. With prepaying to bank 50000-1lac once in a year i was able to cope up with increased interest rate (floating). On August 2008, Interest rates were approx 11.5% floating and then later it came to 9.5, again now its 11.5%.
Early Prepayment is always good to curb increased interest rates and best savings also. I think i got multiple benefits like, appreciation, tax benefit, early prepayments – down interest giving and 'Peace of Mind' owning a house.
I think this will help you to decide buying a house and save more by prepaying to bank. Prepayments are free in many banks.
Will it not be advisable to take Insurance policy and then loan against insurance.
Helpful! I see manish in myself! I was thinking the same nowadays.
Confusion level increased!
One thing i will say is, this article puts on thinking and re-thinking before you take any BIG decesion of this kind!
only foolish guy buy house onloan,it is good idea to stay on rented house for small family.
It seems like a foolsih article. If someone loose his job, how can he pay the rent???!! Instead,if have a house of his own, it is a comfort for him and his family that they can move-on with their small savings. Once you loose your job, it is not that you remain jobless for the entire life time. In all the metros, the real estate prices have gone up about 5 times within 5 years. Those who booked a 2 BHK for 20 lakhs five years ago, the present price is about One Crore, and the person did not have taken more than 12 Lakhs as loan. In whatever context, the Article seems to be negative thinking and foolsih.
I personally think the value of the satisfaction you have, of living in your own house, cannot be quantified. If that matters to you, it does. If it doesn't , it doesn't. Its all very personal to each person. All decisions cannot purely depend on financial planning. There is an emotional component to decisions like home-buying which each one has to be aware of. It's how he/she feels. There's no right or wrong about it. Then come all the other financial calculations.
Of course, it is much pleasant to live in your own home, but sometimes people just can't afford it. Due to the tough financial times and unstable economy we experience now, I wouldn't risk taking out a mortgage. There is no guarantee that you will have a stable job in future and it will be much worse if you will lose your home having paid for it a lot of money. A lot of people struggle with their mortgages now being unable to make payments on loan. Many homes are foreclosed now and even though there are some federal programs which are created to help homeowners, they don't work well now, I think.
gud 1…
Hi you cannot draw parallel with this case study as each individual is different in his own way. The thing which is right for me will be wrong for some one else. This article has to be treated as another case study. We should take only the good thing relevant to that particular individual and scrap the rest. Salaried man's requirement is different as compared to a business man. So please don't draw parallel's.
First house is out of doubt a need. Every family needs to invest on a first house irrespective of size. Go for a smaller one if cannot afford the dreamhouse. Try not to negotiate on the locality. Buy as close as possible tot he locality you want to stay. The small house will appreciate over time & will work out as a downpayment for a bigger one when you can afford a bigger EMI. If you have a family, the primary house becomes more a security for your fmily in case something happens to you. Generally the home loan is covered by a term policy from the banker when offering the loan, so that the principal is repaid in case of premature death of the borrower. The EMI will be painful for the first 5-7 years of you term, by then usually it is found that the salaries go up significantly & the emi seems to coume out cheaper looking at the appreciaton of the property. The tax saving on the first property is also another icing on the cake. Housing loan is called the good loan in finance tearms as this gives appreciation of the principal. This is the only loan which is at lowest interest & helps save good amount over a period of time which can work out as a pension plan as you retire by reverse-mortgaging the house. Continued…
Same would not be the case with the second property. A second house should be invested considering the excess cash you can set aside after investing in children education, health policies & term policies. Build a proper contingency fund which can suppot you for a year. Then even if you can garner 15% downpayment & have that extra cash every month to pay the emi, go ahead with the second house. This usually would work in favour of employees who get transfered like me, though not frequently. Own house is a great support for a middle class family. Does not matter if the emi's are still not completely paid. I remember my father buying a house in Mulund Munmbay in 1982 when it was considered a village for a emi of 300 Rs which was half of his salary then. He completed his last emi somwhere around year 2000 and was still paying a emi of 300 Rs when the value of house was significant. Today the same alll paid old house of 30 years is valued as 1 crore. Which if he wants can be reverse mortgage for a hansome monthly pension.
I followed his logic & purchased a house in Mulund for 15 Lakhs in 2007 which appreciated to 45 Lacks in 2011. I pay a emi of Rs. 11000 which is against a rent recieved of Rs 9500. Effectively a diffrence of 2000 paid from my pocket plus the maintenance. I am content & happy that I have a asset for my family in case I am no more.
Had, Manish's Father bought a Flat & left it for Manish he could have paid half of his EMI from the rent he gets from his Fathers house. Rent is a big thing in cities like Bangalore.
I went through ARTICLE + ALL THE COMMENTS and here is the result:
80% people say Go for Home
10% people say Stay on Rent
10% people are confused (including me) 🙂
Good article but is it a good idea in current scenario where property prices are shooting up day by day???
Added more confusions now….
After retirement I plan to move from Bangalore to my small town. I live in a good rented house very near my office in Bangalore. The money which is needed for a flat/house in Bangalore, will get me a very good house in my home town plus at least fifteen acres of agricultural land. I would like to engage in some community welfare activity by employing people at good salary in my fields. The money required for a flat in Bangalore, is enough and more for all my activities at my home town!!! Will this set some one thinking????
In a nut cell It is better to purchase/built house as early as possible. If u can able to afford EMI.
It will work only if property rates dont rise as fast as they do these days. If you had purchased property 5 yrs back in any metro, you would be paying less in EMI than paying the rent plus you have the asset. You can always pre-close the loan and sell it.
The calculations are good only thinking that property rates (rental or own) rise as the interest rates. Which is not so, I also thought the same things, in mid-2007 I saw a flat on second sale for 5.5Lakhs, the price of the same flat is now 30 Lakhs. I did not buy it because I was planning to go to bangalore, there I got a house on rent for 10000, but the rent jumped to 16000 by 2011. I don't think this issue is to be thought only with calculators in hand, in olden days the price rise was steady, now it is dependent on many factors, given are facts I have faced not hypothetical.
The best thing I did in my life that I bought a flat. Initially EMI looked to me as burden but today my EMI is less then that what others are paying as rent in the same apartments. Every year instead of investing money in any tax saving plan I prepaid principle amount. Today, if I lose my job I would be EMI as rent and one day or the other day flat would be solely mine.
Its individual's decision, thought process and situation which make him/her different from others. Please dont treat mine as a case study 🙂 just I know under what circumstances I took decision of buying a flat.
Hi,
Most of them said about appreciation and in favor of buying house, mainly whoever bought on or before 2008/2009 before real estate boom as they got 100 or 300% returns. What is the advise based on current situation. As market may not get appreciated like earlier and returns may not be 100% or 300% after 5 to 10 yrs. So, I would like to know
i) is it better to pay towards partial investment than investing in other plans like FDs etc if we have some surplus money considering tax benefits etc
ii) is it better to buy 2nd home or better to invest same amount in FDs/MFs etc as going forward land/home prices may not appreciate. If you see, for the last 5 years, there is not much appreciation in the real estate market. If I invested on plot just after boom came down, but my plot rate/investment amount is same after 6 yrs. If I could have invested same in post office or FD, it could have almost doubled by this time.
Please shoot your advises considering current situations.