Buying vs renting a home in India

Buying or renting a house is one of the biggest dilemmas most working professionals face in India. The question is especially true now that the Union Budget 2024 has abolished the indexation benefit on real estate investments. All financial gains from real estate will now be taxed at 12.5 percent against 20 percent earlier but with indexation benefits.

This is forcing many people to reassess investment in homes. Our calculation suggests that despite the recent tax changes, buying a house still makes financial sense over a 15-20 year period if the home prices appreciate at the annualised rate of at least 6 percent. Let’s deep dive and break down the pros and cons of the buying vs. renting debate.

1. Buying a house means a large committed monthly expense for the next 20 or even 30 years. This means living on loan for most of your working life. This will require a fair bit of financial discipline and motivation not to mention monetary sacrifices at least in the initial years. In comparison, rental expenses are much lower than the monthly EMIs on home loans. Rented accommodation also provides you with the flexibility to change the locality at short notice or move to a bigger or smaller home to suit your budget or lifestyle choices. Lastly, you negotiate the rent charged by the landlord or ask for additional amenities at little or no extra cost.

2. The interest on home loans has increased by up 200 basis points percent in the last two years after they declined sharply in 2020 and 2021. This has translated into a 15-20 rise in equated monthly instalments (EMI) for home loans.

Till two years ago, EMI on home loans worked out to be around Rs 750 per month for Rs 1 lakh worth of loan with a tenure of 20 years. This has now increased to around Rs 900 per month for salaried borrowers with high credit scores.

This could pinch some if their salary growth has been less than optimal in the last two years.

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3. Home purchase also requires you to pay margin money or make a down payment to avail of the loans. Most banks ask for a 20 percent down payment amount to the borrower’s equity contribution towards the house, though margin money can be reduced to as low as 5 percent for some borrowers. The more down payment you make, the lower your EMI.

A house worth Rs 50 lakh will require you to make a down payment of around Rs 10 lakh.

This means that you need to start savings a few years before you decide to buy a house or dip into your retirement corpus such as a provident fund, take help from your family and friends, or do a bit of all.

4. As a homeowner you will also need to spend money on maintenance, property taxes and occasional repairs and refurbishments. While the maintenance cost is levied by the housing society that provides the common facility; property taxes are charged by the municipal bodies. At the prevailing rate running expenses could be anywhere from 1-2 percent of the property acquisition cost depending on the amenities and the apartment size. Expect these expenses to rise at an annual rate of 3-4 percent in line with the cost of living.

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5. A tenant just has to bother about the monthly expenses and leave all other worries to her landlord. Besides, rents are still much lower than EMIs for apartments in most cities. For example, at the current home loan interest rate of around 8.75 percent, a house worth Rs 50 lakh will cost around Rs 36000 as EMI assuming a down payment of 20 percent. In comparison, the same apartment can be taken on a monthly rent of around Rs 20-25,000 in a decent locality in large cities like Delhi, Mumbai and Bangalore. However, unlike EMI which is largely fixed during the tenure of the loan, the rents are expected to grow at 8-10 percent every year.  

6. As a tenant you also have the option to invest the potential down payment of the margin money into high-yielding assets such as equity mutual funds, corporate deposits or provident fund.

An initial investment of Rs 10 lakh into a diversified equity mutual fund will grow to a corpus of around Rs 61 lakh at the end of 20 years assuming an annual return of 10 percent.

In the last five-year diversified equity mutual funds have given 11 percent annualised returns on average. This is an opportunity loss for home buyers that they can hope to recover through the appreciation in their home prices over the years.

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7. Now let’s compare the full financial cost of home ownership with that of a similar home on rent over 20 years. A back-of-the-envelope calculation shows that renting an apartment is cheaper in the long run only if you are financially disciplined enough to invest the loan margin money in a high-performing equity mutual fund. But buying a house becomes financially rewarding if it appreciates at a rate of 6 percent or more. Assuming home prices rise at an annualised rate of 6 percent, then a house with an initial value of Rs 50 lakh will sell for Rs 1.5 crore after 20 years. A lower appreciation in home prices makes renting financially more rewarding in the long run if equities appreciate at an annual rate of 10 percent or higher.

8. When you decide to purchase a home rather than take it on rent, you have decided to live a frugal and less lavish lifestyle. Homeownership forces you to raise your savings directly or indirectly. This could be a lifestyle choice for many if it involves cutting down on discretionary spending such as exotic holidays, big cars, jewellery or even luxury clothing.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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