Seeking and buying one’s own dream house is a milestone in itself for every Indian. But buying a house calls for huge financial requirements and expenses that follow. So before you decide to buy a house, you need to evaluate your financials and affordability.
Let’s understand todays topic with an example.
Arjun has been working from last 10 years and has now come to Mumbai and stays in a 2BHK apartment on Rent of 50,000/- in Vile Parle area.
Scenario 1: To buy a house
Arjun is looking to buy a house in the same area as he likes the locality. But to get a house in Vile Parle area with the same amount of EMI as his rent amount is not possible. He has two options, compromise on his choice and look for a house in suburbs or outskirts of the city or pay a higher EMI to get his dream home.
He chooses option two of not compromising on his dreams and pay a higher EMI. Now if the house that he wants would cost him 1.5 Cr. Now let’s see how much it would actually cost him.
Arjun took a loan of 1.2cr after making a down payment of 30 lakhs towards his home. His monthly EMI is 1.03 lakh, a 100% rise from 50,000 rent that he was paying. By the end of 20 years, he has paid the bank double the amount of his actual loan. 1.2 Cr was the interest rate itself.
Now this is the loan and the EMI side of it, which is very expensive for Arjun. To attain this, he will have to make massive adjustments to his lifestyle and amp up his savings and investments to help cope with the payments.
But the plus side is the Tax benefits he gets on his loan.
The thing to keep in mind here is that when you are buying a house, there is going to be property appreciation and over a period of 20 years, a house which was worth 1.5cr would be anywhere around 8-10 CR. Time again has earned you the highest money.
Scenario 2: Rent it
When you rent a house, you can take a breather as you don’t have to pay a chunk of your savings away as down payment and also have enough time in hand to build wealth to buy a house in the future. But again, the property prices will always be on the upside and a house which cost you INR 1.5cr today would cost you INR 5-7 CR in the next 8 to 10 years.
Now look at this table and try to understand it.
So, from the above table you can understand that
If Arjun stayed on rent for 20 years, he would pay a rent of 2.7 Cr in total and earn 1.3 Cr in investment.
But if he had bought the house, he would pay an EMI of 1.03 lakh a year, that makes 2.06 Cr for 20 years, down payment of 30Lakhs but the property appreciated to 8-10 Cr. from 1.5 Cr. over the period of time. An overall gain of around 6-8 Cr. Plus the tax benefits that followed.
It’s a tricky situation after all. If you look at short term, renting is a better option, but if you look at longer term, buying is a better option. Buying a house is an achievement in itself but the time and money plays a crucial role. If you have saved up well to pay a good amount as your down payment, go for buying a house. The other way to go about is, go for a smaller property which fits your budget and collect more money over time and later upgrade to a bigger house.
Buying a house is a goal everyone should fulfill but go for what you can afford or plan accordingly and budget it right. You want to enjoy the house that you got for yourself rather than being burdened by the loan and also not saving for your other goals like child’s education and retirement.
With this I have completed the segment on housing and mortgage. In the next few blogs I will talk about kids and investments and the next topic for my blog is “How to raise financially savvy kids”
Till next time
Be indoors and stay safe
This blog is a part of Blogchatter’s A2Z challenge #blogchatterA2Z