Home Loan or Rented House - Things to consider before taking a home loan

Know your financial gains before taking a home loan

Everyone who does not own his/her flat, always think of one question, 'Whether to stay on rent or to buy own house'. Everyone has different opinions, different calculations. Those who holds enough money, buys their dream house irrespective of any calculations. Some persons fulfill their dreams by taking a home-loan. So, if you fall in the first category it is good for you and go ahead to fulfill your dream. But if you are not amongst those lucky ones and planning to take a loan, then better stop for a moment and think again.

Some Questions and Calculations

Now, you must do some calculations and also check whether you are into your own business or working under a boss. In case you are a working guy like me, you never know when you may have to switch your job and relocate to another city. If you need to relocate, you will be having two options:

- Stay on rent in another city and continue your home loan

- Sell your home and buy a new one in another city

For the option one, ask yourself, can you really afford giving away rent along with your home loan? If answer is yes, that’s really great and you must be living a happy and comfortable life. But, I believe most of the persons would not be able to say ‘Yes’. So, only option left with them is to sell off their home, but now you are not very sure how much money you will get for your home and in the recession like situations, you are likely to get much less price than you would have paid.

Now let us take a scenario where no such circumstances occur and you stay in your house for around 20 years even though it is quite unlikely to happen if you are in a job.

Suppose you have bought a house worth Rs. 4,000,000/- ($80,000) in India and took a loan of Rs. 3,200,000/- ($64,000) for 20 years at 12% interest rate.

Initially you have paid Rs. 800,000/- ($16,000) from your pocket for down payment plus some charges for Stamp duty and registration charges. Total will add up to Rs. 1,160,000/- ($23,200).

As per 12% rate of interest, your EMI would be more than Rs. 35,000/- ($700).

Total EMI amount after 20 years will be more than Rs. 9,600,000/- ($192,000).

In India, you will get tax exemption on home loans, so you can save around Rs. 2,000,000/- ($40,000).

Initially you have paid Rs. 1,160,000/- ($23,200), so if you will calculate loss of interest at 8%, you have lost around Rs. 4,240,000/- ($84,000).

This means your dream house has cost you Rs. 11,840,000/- ($236,800).

Are you sure you will get the same amount after 20 years or so?

Home Loan v/s Rented house
Home Loan v/s Rented house

Now consider if you have been on a rented apartment/flat with rent of Rs. 13,000/- ($260) per month. Every year rent increases by 10%, then you will be paying Rs. 7,400,000 ($148,000) in 20 years.

Initial deposit you will be paying is Rs. 25,000/- ($500).

Tax benefit you would be receiving on house rent will be Rs. 1,550,000/- ($31,000).

Interest amount that you will be losing for 20 years would be Rs. 91,500/- ($1,830) on the initial Rs. 25,000/- deposit.

So you would end up spending Rs. 5,941,500/- ($118,830) on rented house.

Now compare the amount you have spent:

For your own house: Rs. 11,840,000/- ($236,800).

For rented house: Rs. 5,941,500/- ($118,830).

On rent, you got nothing after 20 years, but you have your own house if you will buy one. Extra amount you have paid is Rs. 5,898,500/- ($117,970). This is the effective cost you paid for your home, seems to be a fair deal if you will get this amount after 20 years. But wait and look for another calculation.

EMI you paid: 35,000/-

Rent Paid: 13,000/-

Difference: 22,000/-

This amount you can invest monthly and can earn interest for 20 years.

So if you will invest the difference amount, you can invest some amount for 12 years and after that rent will be around 35,000 same as your EMI for home-loan. So if you will calculate the returned amount after 20 years, it will be somewhere near to Rs. 6,500,000/- ($130,000).

This is the amount that you will get with 100% surety without any risk even if there is another sub-prime crisis or so and now you may use this amount to buy your own house which is not 20 years old with less tension of getting relocated to another city at this age after 20 years. Another option you will be having to start some business with this amount and earn millions. What I will suggest is if your home-loan EMI is exceeding by 50% or less than your monthly rent, then you better go with home-loan and buy your dream home. Otherwise some one has truly said “Cash is King”.

What do you think is better -

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Comments 38 comments

willpower123 profile image

willpower123 7 years ago

good thoughts

anujagarwal profile image

anujagarwal 7 years ago from Noida Author

Thanks willpower123

sandilya 7 years ago

Hi Anuj,

Nice article and nice calculation, i agree 100% to it. but to be frank, all this is useful if one is staying as a bachelor for lifetime, or one's parents have their own house @ their hometown.

this is because, staying rent has always some subtle but problems too like, if u plan a wedding or any occasion or soo....., in the right time the owner can ask you to vacate for his own problems, or and bad things he cannot accommodate, indians are sentimental about houses. moreover, the confidence you have @ ur own house is different than the rented one's.

the calculations u show are no doubt definitely excellent but that's the only blindly believed asset to a common typical middle class indian.

hmmm, this is all what i can say.

anujagarwal profile image

anujagarwal 7 years ago from Noida Author

Thanks Sandilya for the comment, and it is absolutely correct that we Indiand are sentimental about owning a house.

But even if you are a bachelor or staying with family, and as I said if you are a working professional, you never know when you may have to switch your job and relocate to another city. And in that case what you will do with your home loan and that home. You will be forced to be on rent again... But if you can buy a house with full payment, its great...

sophieqd profile image

sophieqd 7 years ago

Great Hub! Very informative with lots of sound advice. Works for me!

yash24 profile image

yash24 7 years ago from india

Good calculation

anujagarwal profile image

anujagarwal 7 years ago from Noida Author

Thanks Yash

scheng1 7 years ago

My goodness, the interest rate is 12%!! the interest rate in Singapore seldom goes above 6%,and we are already screaming!

anujagarwal profile image

anujagarwal 7 years ago from Noida Author

Thanks for the comment scheng1. Interest rates in India are normally in the range of 8-13% for home-loans.

explain reverse mortgage  7 years ago

Lots of sources here to help some one that is in need of advice, the kind of information a lot of people are looking for thank you. Some times it hard to ask for help, but with this kind of information it all becomes easier.

anujagarwal profile image

anujagarwal 7 years ago from Noida Author

Thanks for the comment erm.

excaflowne profile image

excaflowne 7 years ago from The Heavenly Archipelago

nice article.. it's inspiring me..

anujagarwal profile image

anujagarwal 7 years ago from Noida Author

Thanks for the comment excaflowne.

Asha 6 years ago

Very good article. but what if you can rent your home when you relocate and stay in a rented apartment in the new city?

anujagarwal profile image

anujagarwal 6 years ago from Noida Author

It depends if you are able to fetch almost same rent that you will be paying in new city. Also, there is an added burden of getting rent on time and you never know what is the condition of your home unless someone is there for you to regularly check all this. For an investment point of view, there is no harm in buying a home, if chooses properly.

Basha 6 years ago

Very nice article

Amit 6 years ago

1 thing is missed in calculation....cost of House after 20 years....It will surely not be the same as it is today.

cost after 20 years will be equivalent to 4 times of today cost.

anujagarwal profile image

anujagarwal 6 years ago from Noida Author

Thanks for your concern Amit. Actually cost of house is not missed, it is just shown as an amount which is speculative. If there would be another sub-prime crisis or bust in real-estate, you wont be getting anything fruitful.

Sunny Dsouza 5 years ago

Thank You Anuj, for this great information. I hope interest free home buying option should come in India, Mumbai.

anujagarwal profile image

anujagarwal 5 years ago from Noida Author

Though, everyone will welcome interest free home loans in India but it won't happen unless there is a big time slump in the housing market and demand is very low.

Vanishree 4 years ago

One more thing not considered in the article. Salaries wont remain same. 35000 EMI which may look more now might seem to be very less after 3 to 4 years. And salaries and real estate are not growing equally. Real estate is growing way faster than the salaries. Hence, collecting money first and buying home making full down payment might become impossible in coming days. And home loan is the rescue right now.

anujagarwal profile image

anujagarwal 4 years ago from Noida Author

You are absolutely right that salaries wont remain same, but if one is not able to afford the high EMIs and since the cost of real estate is growing at a very high rate, it will be too difficult and almost out-of-reach for a common man to buy a house. I recommend one to buy a house if the EMIs are less than double the rent they are paying or if they have sufficient cash.

monicamelendez profile image

monicamelendez 4 years ago from Salt Lake City

Solid advice. It's always better to think about changes that could happen. I decided to buy a town house instead of a home because I wanted to be able to rent it out if I moved.

anujagarwal profile image

anujagarwal 4 years ago from Noida Author

Thanks for dropping by 'monicamelendez'. You have done it right by owning a town house so that your investment can generate some income.

Harsha 4 years ago

Very Nice information Anuj..Gives a lot of clarity to make a better decision..

Thanks :-)

anujagarwal profile image

anujagarwal 4 years ago from Noida Author

Good to know that the information above helped you make a better decision.

Pachi 4 years ago

It was very informative, I would like to know which option would be good floating interest or fixed interest?

anujagarwal profile image

anujagarwal 4 years ago from Noida Author

@Pachi: In my opinion, it is better to opt for floating interest unless fixed rate is really low. As per current interest rates that are more than 10%, it does not make much sense to opt for fixed interest loan.

georgi 3 years ago

this is an awesome advise. i take it .....and i ll plan accordingly for future

anujagarwal profile image

anujagarwal 3 years ago from Noida Author

Thanks for finding the information useful. I hope you will take the best decision.

rishi bhamra 3 years ago

hi anuj....you have done impressive job here i must say...

i like your insight about loan vs rent

i have a question ..suppose i have 30 lakh in my savings, i dont have a house of my own...cost of property is around 40 lakh ...should i save more 20 lakh in two years and wait..so i can get interest on fd around 10 percent( 50000 rs per month)and pay through this interest ...or should i take loan right now ...please suggest

anujagarwal profile image

anujagarwal 3 years ago from Noida Author

Thanks Rishi for finding the information helpful. As you have already saved a decent amount, it makes sense to purchase the property right away as you never know how much the similar property will cost after 2 years.

I will also suggest you to not put more than 25 lacs from your savings. The reason being, you will always have some emergency fund in your account and as it seems you are in the highest tax bracket, opting for home loan will also help you in saving income tax.

The option to stay on rent is more beneficial for those who finds it little difficult to pay the hefty EMIs and/or down-payment. Also, if the nature of the job requires frequent relocation.

I hope it will help you in taking the decision.

rishi bhamra 3 years ago

thanks for quick reply anuj

what if i save 50lakh by 2015...so i can get interest rate @ 10 percent

the earning from interest (i can pay loan emi )from it...and also if the property price remains 40lakh

then what do you suggest

anujagarwal profile image

anujagarwal 3 years ago from Noida Author

On 50 lacs, you will get 5 lacs annualy in interest rate. If you will consider capital gains tax on interest amount, the amount will be 3.6 lacs (considering 10K exemption). It means you will get only 30K per month and not 42K. At the current interest rates on home loan, which are around 10.25%, you will not be losing much. Instead, it would be better to prepay the loan amount after couple of years.

rishi bhamra 3 years ago

thank you soo much Anuj for your inputs and time

anujagarwal profile image

anujagarwal 3 years ago from Noida Author

It's my pleasure Rishi. If you want any other information, feel free to contact me via http://anujagarwal.hubpages.com/#email

saurabh tainmguriya 3 years ago

Anuj , when you are staying on rent, then on monthly basis you are losing the your amount not gaining it. But when you pay EMI the you are investing the same not losing. And If you can afford a EMI then you should go for the your own home. this will give internal satisfaction of own home. Suppose you gone for some other city then you are going for earning then always you had a pressure of you rlandlord , there would be a lot of restrictions and feer.

dr nishant 21 months ago

dear anuj, im a medical proffessional n find these matters difficult to understand. ur articles really helped me a lot to understand these apperently cbmersome calculations. thanks a lot

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