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.