For Indian first-time potential homebuyers, it could be tricky to understand if they should take a long-term loan or stick to renting. Both options have their own perks. While a home loan offers the comfort of ownership and long-term asset creation, it also brings the burden of high EMIs and reduced financial flexibility. This can be particularly true for metro cities where prices remain steep.
On the other hand, renting keeps monthly costs lower and predictable, freeing up more income for aspects such as investments. It also allows the tenant to have more flexibility over their lifestyle choices as rental accommodations can be switched based on financial comfort.
Whether a high EMI makes financial sense or if renting a wiser option, needs to be studied through calculations. A long-term calculation, based on factors like value of the property, its appreciation, maintenance and other costs can help an investor understand if the long-term financial commitment is worth it.
EMI v Rent In Metro
EMI In Metro Cities
Cost of a 2 BHK: Rs 1.2 crore
Loan: Rs 80 lakh
Monthly Home Loan EMI: Rs 69,426
Time period: 20 years
Interest: 8.5%
Total Amount Payable: Rs 1.6 crore
Rent In Metro
Rent: Rs 30,000 to 40,000/month
This means savings of around Rs 30,000 per month compared to EMIs, which can be invested via mutual funds or NPS. At 12% returns, if someone opted for a Rs 40,000 SIP in equity mutual funds for 20 years, it would generate around Rs 3 crore corpus.
On the other hand, a 10% appreciation rate on a Rs 1.2 crore house over 20 years can boost its value to over Rs 8 crore.
Here, investors need to decide what matters more to them. They can invest in SIPs or other tools while enjoying flexibility, or choose the mental comfort that comes with owning a home.
EMI V Rent In Tier-2
While many may think that renting is ideal for tier 1 or metro cities, given the steep property rates, the picture for tier-2 cities could look different.
In tier 2 and tier 3 cities, property prices are relatively affordable. This brings EMIs closer to rental costs. Many of these cities are also emerging as economic hubs with strong long-term growth potential. In such cases, buying a home may be a sensible option, depending on an investor's risk appetite and long-term goals.
Cost Of 2 BHK In Tier 2: Rs 60 lakh
Loan: Rs 36 lakh
Interest: 8.5%
Time: 20 years
Monthly Home Loan EMI: Rs 31,242
Interest Amount: Rs 38,97,993
Total Amount Payable: Rs 75 lakh
Rental In Tier-2
Rent: Rs 18,000 to 25,000/month
Here, the EMI-to-rent gap is manageable, which makes ownership far more attractive for first-time buyers.
What To Consider As Buyers vs Tenants?
While there are many factors to consider before buying property, a few basic rules can help investors decide. A common thumb rule in India is that rent should cover at least 50% of the EMI. For example, if the EMI is Rs 80,000, the rental income should be Rs 40,000 or more. This helps reduce cash-flow stress and improves long-term returns through price appreciation.
Investors should also account for hidden costs, such as stamp duty, registration charges, property tax and maintenance. On the other hand, while renting, experts suggest rent should not exceed 20% of annual income. Higher rental costs can strain finances and may not be a wise fiscal decision in the long-term.
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