Buy a home on loan or rent?-2

This is part II of the article Buy a home on loan or rent?. Please read the first part before proceeding with this one

So unfortunately, the dilemma continues. But just take an example as cited in my previous article. You decide to buy a flat costing 40 lakhs. You get 32 lakhs as loan from the bank. Rest 8 lakhs you put in from your own kitty. The EMI typically comes to around 30,000 per month for 20 years. So for 32 lakhs loan, you return to the bank an amount = 30 K * 12 months * 20 years = 72 lakhs.

This amount is double the amount of money you are taking from the bank as house loan.

Off course this has to be repayed over a long duration of 20 years so DCF analysis will lead to a lower amount, but this figure tells you the cost of loan. But is it really worth taking a loan when the bank is earning more than double the amount from you? More so, in the world which is full of uncertainties – about your job, your salary and everything else?

Also, don’t forget that 8 lakhs you are paying from your pocket. Ultimately, if everything goes well for 20 long years – one fine day you will become the real proud owner of your house, maybe when you reach in your forties or approaching 50. During these 20 years, you would have lived with either of the two:
• A bit worried look about job and salary uncertainty – due to your home loan commitment OR
• An ignorant belief and worry less life if you want to keep yourself ignorant about your home loan & your uncertainties

To me, majority of (sane) persons would be forced to live with option 1. Add to it the increase in cost of living due to marriage, kids, their education, elderly parents (their medical care) and so on, and things will keep looking difficult (may not be difficult in reality, but due to the commitments).

Ultimately, it all depends upon the individual – how he takes it. People will have all kinds of flashy words & phrases – “Positive outlook towards life”, “Taking up the Challenge”, “Doing something on my own” and so on, the fact is that in case of a financial distress (if it occurs), you will be left all alone. The same friends who advice you will no longer be willing to see you and you will have to face the situation on your own.

Take a step forward:
Instead of taking the house on loan now, go for a rented one for a period of say 10 years. In an IT city like Hyderabad, a typical 2 BHK flat would cost 8 to 10 K per month. Assume that you start with 9K and your house rent increase each year by 10%. So overall, during these 10 years, you would pay to different house-owners a total of 17.2 lakh Rs. (Round it to 18 Laks)

On the other hand, during the same 10 year period, if you had taken a housing loan, you would have repaid to the bank half of 72 lakhs – i.e. 36 lakhs and 8 lakhs upfront from your kitty = total 44 lakhs. Of course you would have become part owner of your house in this case.

So, in case of renting the apartment, you save 44 – 18 = 26 Lakhs as compared to buying one on loan.

Even if the real-estate prices keep on increasing at a rate of 8% each year, the house costing 40 lakhs today will cost 80 lakhs after 10 years.

So think about buying the house then. Will it be a better option? Let’s see:

• During these 10 years – you’ve lived freely – no commitment – no worries
• If you loose your job, you pack up your bags and go back to your native town.
• If you are still able to keep up your job for 10 years – that means you are worth it. However low, you can still expect atleast a 5% salary hike each year. That will add to your accumulated savings, which will severely reduce your loan amount.
• You can take decision on “Take things as they come” basis
• Your rent savings will be more, if instead of paying an increased rent, you opt to move to another apartment of same rent or low rent.
• You don’t have to worry about any kinds of problems that may be linked to a house purchase and its later consequences as mentioned about the risks with a house purchase in this article
• If the reality markets go for a correction, you will have the option of buying the similar flats with cheaper price levels – anytime during the 10 year period – meaning more savings in future than present day high price purchase
• In the 10 year period, you may move around 3 time to 3 different houses. It’s not that difficult to find a house on rent

Nothing in this world comes without risks and compromises:
• You will have to keep moving to other apartments if the rented house or house owner is not good (Independence for some, problems for others)
• You will have to think carefully about your family (if married) and plan your family developments
• People usually do not appreciate a family man living in rented apartments for long. One may have to face it. However, the benefits of postponing the purchase can be a major beneficiary

Ultimately, the choice is yours. You have to fight against the variations in the markets. You have to take the decisions on till when to rent and when to buy. If buying then is the market really low or can it go down further.

I may have missed some points in the calculations above. Some assumptions may be faulty. However, the essence that I want to convey is that just don’t forget that loan is very-very costly. Avoid it as much as possible. The mental tension that one gets once he’s in debt cannot be explained. His negotiation power reduces, he cannot switch job and move to another city easily, he starts worrying about the job, its’ security, the family, kids and very simple liabilities add up.

Hence, take the minimum possible loan. Live a happy and stress free life. Use your own money. Leave the OPM concept to banks and brokers (OPM – Other people’s money –like the business of MF managers, brokers, etc.) OPM is not for people without financial background.