Buy house on loan or save on rent?

While discussing their personal life, Shekar asked Manish about his house rent. Manish said he was paying Rs. 16.500 for a two BHK flat just on the edge of the city.

Shekar, who had come from a smaller town, was shocked that someone could pay so much as rent.

He wondered that Manish was doing a foolish thing to pay rent to someone else, why not pay the same amount as EMI and get a home loan. Over a period, the home would be yours, said Shekar. This got Manish thinking.

...

However, Manish decided to test this with his mentors. He went to five of them and asked them to give one reason why he should not think of exchanging his monthly rental with an EMI?

They said

i) 'Interest'ing part: His father advised Manish that he personally had not taken a home-loan in lieu of staying on rent, as he could not digest giving his hard-earned money to a financial institution as interest.

Manish countered this by saying that he was instead giving his hard-earned money to his landlord.

...

"On buying a house worth Rs. 30 lakhs, I would end up paying Rs. 28 lakhs as interest to the bank over a period of 15 years (even at a low interest rate of 10 per cent per annum), why should I do that?"

Manish now had one reason to rethink his idea.

...

When he asked his colleague Angel the same question, she asked him what his career aspirations were.

He said he wanted to be the country manager of his company in the next few years. Angel said that his aspirations itself were an answer to his question.

If he got posted out of the city he will have to take a new house on rent in the new place and also pay the EMI for the old house.

Although he could save some part of his EMI by renting out his "own" house, it was very rare that he would get the same or higher amount as rent.

The risk of defacement, poor maintenance, irregular rent payments, etc, too was there to think of. Manish now had a second reason to rethink.

...

Manish asked his wife the same question. She replied saying that they were now only three of them (Manish, his wife and two-year-old child.

But they were planning to have one more. With four of them and regular visitors they would need a three- or four-bedroom house.

But, if he takes a 2 BHK on loan, then he would be stuck with it for at least 15 years.

With a rented home he could always move to a bigger house when needed.

...

Manish decided to ask someone who had done the same thing (shifting rent to EMI). He spoke to Ajay, his boss.

Ajay said that when he was on rent he used to pay Rs. 12,000. But when he took a house, he took it on an EMI of Rs. 22,000 as the EMI were small and his wife kept saying: "It's a onetime investment, so let's go for the biggest house possible".

This thought made them buy a house with a loan EMI that was almost twice the rent.

From that day on Ajay had to be frugal with his life style.

...

Manish still thought he needed a strong reason. He went to his financial planner and told him all the reasons given by his advisors.

His planner added to the list asking: "What if you lost your source of income? How would you repay your EMI?"

Manish countered that by saying why should he worry about things like extra rooms, losing income or being posted out of town, as he could always sell his "asset" - the house.

To this, his planner replied that Manish would have to understand that the house will not be his until the end of the last EMI and hence it was a myth to think of it as an asset.

Also, if he had to sell the house under emergency, he would not get a good rate.

...

His asset appreciation would be comparatively lesser as his principal would have reduced by minimal amounts in the first 5-6 years.

To this, he would have to add the broker charges, registration fees, pre-closure charges, etc. Thus gaining less for all the trouble. Manish now had strong second thoughts of replacing his rent with a home loan EMI.

Rather he decided to move to a cheaper rental home and invest the surplus in a "buy a house on a high down-payment fund" to raise at least 50 per cent of the loan amount before going for a house.