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This appreciation in the value of the property makes a compelling case for buying a house with a loan. The individuals are actually leveraging the amount that they have with themselves by taking a loan and financing a larger cost house. The benefit of the appreciation in the value is available for the entire amount even though it might take years for the person to pay off the loan and finance the complete house.
Let’s take a look at the various options available:
Rent a house Buy a house with savings Buy a house using a home loan ADVANTAGES - Rent is much lesser than a home loan EMI.
- You have the option of shifting cities till you select the city you want to settle in.
- You have the option of choosing your dream location before you buy.
- It’s a good option for senior citizens or those without monthly income.
- You are not hurt by rising prices.
- Interest paid on home loans is higher than Fixed Deposit earnings, so it’s better to not take a loan.
- You can own a house early on in life.
- You are insulated from increase in property prices.
- You can avail of tax benefits.
DISADVANTAGES - Rents keep increasing and the amount paid as rent is lost forever.
- Shifting houses is not as easy as it seems.
- You have to pay brokerage every time you move to a new house.
- You lose interest on the security deposit you pay the landlord.
- Tax benefits of a home loan cannot be availed.
- Home price increase can hurt when you are ready to buy.
- You need to save for years before you can buy.
- A lot of money is locked in.
- Tax benefits cannot be availed.
- EMIs can be very high when compared to rent amount.
- If you are likely to shift cities, you are stuck with a big loan.
- You have to shell out a large amount upfront for the purchase.
As you’ve seen, there are situations where buying a house is better than renting one or vice versa. Let’s take a look at it from ‘Rupee’ perspective.
Some points to note are:
- Rents paid in a year work out to 4% to 6% of the property value. So, a house worth Rs 25 lakh will most probably have a rent of Rs 8,500 to Rs 12,500.
- Rents increase on an average of 5% every year, though it can be higher in some cities.
- Property prices usually rise by 5% to 10% every year, though in recent years the rise has been much steeper.
- Interest rate on a home loan has been in the range of 8% to 13% in recent years.
- When you buy a house, you also have to pay maintenance charges, which you normally don’t, when you rent a house.
- Tax benefits can be availed by both taking a home loan and renting a house.
Simple Maths of Buying a House
Loan amount (10% interest rate) Rs 20 lakh Rs 50 lakh Value of the house Rs 22 lakh Rs 60 lakh Term 20 yrs. 20 yrs. EMI Rs 19,300 Rs 48,250 Interest repaid every year, deducted from income Rs 1,50,000 Rs 1,50,000 Tax bracket 20% 30% Tax saving Rs 30,000 Rs 45,000 Tax saving per month Rs 2,500 Rs 3,750 Actual cost (EMI- tax saving) Rs 16,800 Rs 44,500 Rent Rs 8,000 Rs 20,000 No. of years it will take for rent to increase to the level of actual EMI 15 17 A point to keep in mind is that rents will go on increasing every year whereas the EMI will remain constant.
Published on May 5, 2010 · Filed under: Home Loan Guides; Tagged as: Home loan, home loan bank, Home Loan eligibility, home loan guide, Home loan rate of interest, home loan repayment
When To Opt For A Home Loan
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