Paying rent versus buying a house’ is an age-old debate that feels particularly loaded now. With the rise in property prices (average increase of 6% each year in the last decade, as per a Crisil report) and interest rates, it is imperative that first-time home buyers arrive at a decision earlier. The decision to buy or rent a house is influenced by a variety of factors, such as price, equity, rentals, taxes, and so on.
India’s home loan market is currently valued at ₹24 trillion and is expected to double in the next 5 years. The share of housing loans in banks’ credit has increased to 14.40% in June-2022, as compared to 13.1% in March-2020 (as per a SBI report on home loans). The Reserve Bank of India (RBI), which faces the twin challenges of fostering growth while batting inflation, has increased repo rate (the benchmark lending rate) six times in the current fiscal year, the rate now stands at a 3-year high and this has slightly impacted the affordability of home loans.
Rent vs buy conundrum will need a broader understanding because of multiple factors. Owning a home is always an important and significant anchor in financial planning and also has an emotional connect to it. Factors like financial stability, office location , a hybrid work setup post-pandemic , type of employment—transferable or otherwise—etc., plays an important role. Lets understand the pros and cons associated with buying or renting of homes. Below are the advantages:
Equity: You repay your lender every month; ultimately the money comes back to you in the form of equity as the market value of your home appreciates over time. This can be a great way to build a solid financial foundation for your future and potentially provide a source of savings and wealth for your family. Also with a fixed-rate mortgage, you can be assured that your monthly payments will remain the same for the tenure of the loan. Rentals, on the other hand, rise every year.
Stability: Owning a home can provide stability and security for you and your family. You have control over your living space, and the freedom to stay in your home for as long as you want without worrying about landlords or lease agreements. This provides comfort that is hard to find when renting.
Community belonging: You have a sense of ownership and belonging that comes with being a homeowner, and you’re more likely to establish roots in the neighbourhood. This can be especially important for young married couples who plan on having children.
Additionally, you can also avail of the tax benefits on the interest portion of your home loan repayments. You can get a tax deduction up to ₹1.5 lakh on the interest portion of your home loan repayments.
Some disadvantages associated with home buying are also worth noticing:
Down payment: Home ownership requires a significant upfront investment, which may create a large dent in your savings; you are effectively shifting from a liquid to non-liquid investment.
Maintenance: Home ownership comes with the added cost of maintaining the house, which can disrupt your financial planning.
Renting a house does have its advantages: Easy to move—you may shift houses for your career, family, or education, as the situation may be, and taking property on rent makes this one step easier. No upfront payment—shifting doesn’t involve much costs (it needs a few months advance rental that is refundable) and doesn’t impact your finances much. On the flip side, you have to deal with the annual increase in rentals. Your landlord can also ask you to move out anytime.
With robust growth anticipated in the number of housing loans, rising interest rates should not deter one in arriving at a buying decision. Analysts says once the interest rate hike cycle starts, people tend to take home loans faster because they anticipate further hikes and fear that the longer they wait, the more expensive home loans will become. The advantages of a permanent home seem to tilt the decision in favour of buying. An individual should better decide when to enter the housing market and start looking, based on what stage of life she is currently at.
Anuj Sharma is chief operations officer at India Mortgage Guarantee Corporation (IMGC). The views expressed here are personal.