Many cultures, including Indian society, deeply associate the concept of home with a sense of stability and comfort. Growing up, many of us are taught that owning a home is integral to living a successful life. This is reflected in common sayings that emphasize the need for shelter, often summarized as "roti, kapda, aur makaan" (food, clothing, and shelter).
Social Pressure
Keeping Up with Peers: In our social circles, home ownership can often serve as a status symbol. Hearing friends discuss their latest property acquisitions can evoke feelings of inadequacy if you don’t have a similar achievement. For instance, if a friend announces ownership of a lavish duplex, thoughts of wanting similar luxuries may arise.
Lifestyle Changes: Many consider moving to a new home as an opportunity for a lifestyle improvement. Enhanced amenities such as better security, parking facilities, recreational areas, and a more spacious environment can motivate individuals to purchase a home.
However, this emotional push can lead to impulsive decisions. Careful consideration is necessary to prevent buyers' remorse stemming from societal pressures rather than genuine need.
determine if buying or renting is more financially sensible.
Assessing Housing Costs: Renting vs Buying
Renting: If you consider the monthly rent to be approximately ₹20,000, with a potential annual increase of 7%, your financial commitment over a 15-year span can be significant.
After Tax Consideration: With a HRA (House Rent Allowance) benefit, the effective monthly rent—considering a 30% tax bracket—would be approximately ₹14,000. Annually, this totals to ₹1,68,000.
Total Rent Over 15 Years: At a 7% annual increment, the overall rental payment could reach around ₹4,221,676.
Buying a Property: Let's assume the cost of the home is ₹75 lakhs. With a standard down payment of 15% (about ₹11.25 lakhs), you would take a loan for the remaining amount. Here’s how the financials pan out:
Monthly EMI Calculation: With a loan calculated at a 7% interest rate over 15 years, your EMI would be roughly ₹57,300. After considering tax benefits, the effective EMI is reduced to approximately ₹50,082.
Total Financial Commitment: Over the 15-year period, including principal, interest, and maintenance costs, the total expenditure for home ownership (assuming maintenance at 0.35% annually) could rise to about ₹1.07 crores.
Comparisons and Net Benefits
At this point, you may ask, which option is ultimately more beneficial?
Renting: When evaluating the net benefit of renting, taking into account future investment returns from the saved down payment and monthly EMIs can highlight its advantages.
Investment Potential: If the down payment of ₹11.25 lakhs were invested at a compound annual growth rate (CAGR) of 10%, the returns could amount to approximately ₹50,10,659 over 15 years. Furthermore, regular savings of ₹36,082 from the avoided EMI could potentially yield total benefits nearing ₹1.49 crores after 15 years.
Buying: In contrast, if the property appreciates at a rate of 6% over the same period, the valuation might reach nearly ₹1.79 crores. However, after accounting for all additional costs, your net benefit would total around ₹72.49 lakhs.
Conclusion of Comparisons
In the grand scheme, renting might offer a net benefit that significantly surpasses homeownership in this scenario, with approximately ₹1.57 crore against the ₹72 lakhs from buying.
The 2021 Perspective
It’s essential to consider the evolving scenarios of 2021, including the impacts of new taxation rules. Under the new tax regime, individuals may not receive tax benefits for house rental or for self-occupied properties, which could further influence your decision.
As you weigh the pros and cons, remember that both options come with their unique advantages and disadvantages. Factors such as your financial stability, future plans, and prevailing market conditions will greatly impact your ultimate choice.
The research and understanding you build during this process will empower you to make a well-informed decision that aligns with your personal and financial goals.
Every situation is unique, and as you evaluate your options, consider engaging with financial advisors or professionals for tailored advice.