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8
Jun

What is better - Home loan or house on Rent?

Buying a house is always on one’s wishlist but since it calls for a big-ticket investment, one generally needs to wait sometime before one can purchase a house property. Owning a house is perceived as a dual investment since it allows you to get benefited from the capital appreciation of the property and also save on the rent you would have paid on the rented property instead of staying in your own property. However, given the sky-rocketing prices especially in the metropolitan areas, one may not be able to buy a house sooner through own resources and would have to resort to a home loan instead. While home loan also allows you certain tax concessions, making this big decision still calls for more thoughts to ponder over.

Here are some things you must also consider before making a decision:

 

  1. You need to invest big – Buying a house involves investing a big amount, and even if the payment is to be made in installments, you are still committing to invest a large amount. Further, choosing to invest by taking a home loan, the buyer’s finances are squeezed through down payment first and then through higher EMIs. So, while an individual was staying in the same house costing Rs. 95 lakhs with a monthly rent of Rs. 25,000, getting a home loan makes your pocket lighter by Rs. 40,474 since he now has to shell out Rs. 65,474.
  2. Home Loan takes away a lot of Interest – Home loans are generally considered as a longer tenor loan, i.e. 20 years or more. Just continuing with the above example, you would have paid a total of Rs. 1.57 crores on a home loan of Rs. 0.76 crores (80% of the price). So, you need to pay around Rs. 0.81 crores just as interest, even more than what you borrowed.
  3. Lower Rentals Encourage you to rent a property – While the property prices have been higher, the rentals have still been in a reasonable range of 1.5-3% annual rental yield. As such, staying on rent can still help you stay lighter on debt and live stress-free.
  4. Investing in Other Asset Classes – The advocates of ‘own a house’ theory generally propagate that besides giving you a psychological satisfaction of having your own house, you also tend to gains from the capital appreciation in the property prices. However, one must compare the returns being given by the other asset classes as well. Further, accounting for maintenance expenses and inflation, the real returns given by real estate comes to meager 3-5%. Further, the interest component in the home loan will further lower your returns from the property. This might not be the kind of returns one would expect from a big ticket investment like real estate.
  5. Stretching your resources hard to Own a House – You should always consider your existing savings and future financial position before committing your life’s savings towards purchasing your house property. While making a down payment lowers your additional income from savings like FD interest etc., higher EMIs towards home loan puts a strain on the monthly income as well. Further, your financial goals take a backseat as paying your home loan becomes a priority now.

As such, it is advisable to thoroughly consider both the options before making a decision. You must also consider the option of making systematic savings to achieve the goal of owning a house instead of going overboard by investing through borrowed funds.

Edelweiss Partners helps you to avail of home loans at competitive rates as it is the largest distributor of loans and has strategic tie-ups with multiple Housing Finance Companies and lending companies in India.

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