Published date: Nov 21, 2015; DNA India
Analysing the various considerations that need to be taken into account
We are the fist generation in India that has access to easy credit when it comes to purchasing a house. I’m sure you will remember how tough it was for our parents to secure a housing loan, if at all. In contrast, we are often hounded by unsolicited calls offering us loans galore.
But just because home loans are easily available, is taking a mortgage the right thing for you? Should you continue to rent your home or should you take the plunge and commit to a two-decade long home loan.
Quite clearly, there are several considerations that go into making the decision ‘Rent vs. Buy’.
The first obvious financial consideration is whether you can afford to buy a house? Typically EMIs will be anywhere from 200% to 300% of your monthly rent. Then there’s the matter of the lump sum you will need to generate to make the down payment. So first things first, work out your finances and ascertain your ability to come up with the lump sum and service the loan comfortably every month.
It’s all right to have to cut down on some budget items to be able to afford your EMI initially. Its natural (and also desirable) to have some amount of ‘stretch’ to afford your EMI the first few years but as salary increments and promotions come your way, the (more or less) fixed EMI gets easier to service with time. So do factor that in.
You should also calculate and adjust for the tax saving you will get on mortgage repayment and also account for any property tax payments. And don’t forget to reduce your expenses to the extent of your rent! You can try out any of the online calculators to do the math. If the figures are more or less workable, you can tick off ‘affordability’.
Depending on your location, you are also likely to benefit from capital appreciation of the property in the long run. Bear in mind that unaffordability will likely only increase further as Indian property markets typically see a secular increase over the long term.
While performing all these calculations, you should also remember that rent is an expense while EMIs go towards asset building. So after years of paying rent, you have nothing to call your own at the end of it.
If you are unsure about your ability to service a mortgage, start behaving like you already have a mortgage. Put aside the EMI amount each month. After six months of doing this, you will figure out if it is sustainable and what’s more, you will have put aside a substantial amount that can go towards making the down payment.
Over and above all these financial aspects come several equally important softer considerations. Perhaps the most significant of these softer aspects is the sense of security your own home provides. For those of us who are unlikely to inherit an ancestral home, it’s a must to have your own home. You can’t have ‘arrived’ in life if you are still at the mercy of your landlord’s whims. Your own home is an expression of yourself and a rented house can never fulfill that requirement.
Typically if you can just about afford to rent in a category A neighbourhood, chances are you will not be able to afford to buy a house in the same kind of neighbourhood. You may have to settle for a category B neighbourhood. This may mean making sacrifices like longer commutes to office/school, losing out on being close to your family or further away from malls/movie halls/markets that you like to frequent. Also, the house you may be able to afford may often be below your aspirational level. Or the neighbourhood and gentry may not be as posh as your rented home.
These are all things to consider in depth. Servicing a mortgage is a long term and tough commitment. If you are not going to be happy in the new home due to any of these factors, it will eat away at your motivation and you will end up being miserable and trapped in a home loan for a home that doesn’t bring you happiness. However if you think you can live with a few sacrifices and fulfill your desire to own a home, you should go for it.
Sometimes if you have a transferable job, the above discourse may not apply to you. If you have to move out on short notice, you’ll have to either put the house on rent or sell it. Selling property within a short span of time is a roadblock to securing a good price. Renting out a house to someone while you yourself are located in a different city (or even country) has its own set of problems and would not be advisable unless you have family who can take over and perform the role of the landlord. So if you regularly get transferred from one city to anther, hold off on buying your home till you have the opportunity to settle down in one place for a bit and then spread your roots. In such instances, renting may be a superior choice in the short term.
In a nutshell, if you are not in a transferable job, make sure you can truly afford the house you want to buy. If you can, then introspect and evaluate the downside of the sacrifices you will have to make versus the happiness owning your home will bring and then take the plunge!