Should you buy or rent a house amid the prevailing rate cycle?
18 min read 11 Apr 2023, 08:39 PM ISTRental income from commercial and residential real estate is typically the most favoured choice when it comes to additional sources of income.
PremiumIn its most recent bimonthly monetary policy meeting, the Reserve Bank of India (RBI) chose to hold the repo rate at 6.50%. Rental income from commercial and residential real estate is typically the most favoured choice when it comes to additional sources of income. The repo rate rose from 4 to 6.5% in just six months, and this significant rise in a short period of time resulted in higher borrowing costs which in turn caused the real estate market to worry about the rising repo rate. Interestingly, there hasn't been a change in the repo rate in the current monetary policy, which leads experts to assume that the real estate sector may keep expanding favourably. As a result, amid the prevailing rate cycle, what should real estate investors do, should they buy or rent a house, let’s know the viewpoint from different industry experts.
Bharat Pareek, Head – Products, ICICI Securities
Buying your first house, is more of a personal decision than a purely financial one.
While currently, the interest rates are at or near their peak, it may appear that it would make sense to wait out. But at the same time, it is important to keep in mind that interest rates move in a cycle and home loans are long term. So one averages out, irrespective of when one enters. Hence interest rates alone should not be your decision-making factor. If you are able to afford to buy one and have reasonable visibility of your capability to service the loan, you should go for it, given real estate prices are also on the upswing. But if you are considering taking a loan for your second home, then you should evaluate your finances carefully, as rental yields are way lower than bank FD rates and prices have appreciated in the recent past.
Shruti Jain, CSO, Arihant Capital
Buying a house is a lifelong goal for many Indians and is an important and significant decision in one’s life. The question whether to “buy or rent" is one of the biggest conundrums and highly debated topics.
There is no one-size-fits-all approach when it comes to choosing buying or renting. They are both great options depending on various factors including:
Your financial situation
Where are you planning to buy aka the location
Loan duration and rate
For some people, renting makes more sense given their financial situation. Especially, with the interest costs rising, if you cannot afford it – you should rent instead. There is no reason to put yourself into psychological and financial stress of a loan burden when you are trying to meet the ends and have other financial responsibilities.
Sometimes renting can be even smarter than owning a house, even when you can afford it. When buying a house, our assumption usually is that the price of the house will appreciate over time, it will build equity, and also protect us from rent spikes. But there are various pockets in India, where the houseowners didn’t get much appreciation if you see the 10-year period. Adding to this there are costs associated to owning real estate like building maintenance charges to property taxes to interest on a home loan.
Besides, in the aftermath of covid, property prices have gone up in many cities and real-estate market is quite overpriced. So, if you take a high-interest home loan in this scenario, it may not be the best decision.
It is always a good idea to sit with an expert discuss all the factors and your financials before deciding on buying a new property.
Arvind Nandan, MD – Research and Consulting, Savills India
A home buying decision is a culmination of several factors, financial as well as emotional. There is an element of future-planning and risk-taking as well which goes into such a decision. The EMI dependent home-buyers must factor-in their income stability over the next few years while making an investment, since the ability to service EMI requirements will be paramount. Changes in interest rates often create insecurities about the future.
In the current situation, however, there are a few things to keep in mind. The rates have been steadily rising over the last one year, and the cycle appears to be closer to its stabilizing end. In that sense, the rates may not increase too much or for too long from here. Also, inflation affects the savings as well, by eroding its value.
Hence, if a property that suits one’s needs is available, and financial capabilities are good for now and near future, buying should be a better option. Leasing or renting works better if the price on offer is steeply out of reach and the income stability is not certain. It is important to remember that rents and security deposits would also increase in tandem with the rise in rates and inflation.
Mayank Bhatnagar, Chief Operating Officer, FinEdge
Your decision to rent or buy a house should ideally not depend upon where you feel that interest rates are headed, irrespective of whether you are planning to buy the home as an investment or as an end user.
Remember, a home loan is a very long term commitment that would typically last anything from 15 to 25 years, and interest rates would go through multiple cycles during the tenor of your loan. Since most home loans are at floating rates (the fixed rate ones tend to be priced at prohibitively high interest rates), your EMI’s will rise and fall multiple times during the course of your loan. Just because rates are high or low today, does not mean they will stay the same even a year or two later, so don’t base your 20-year decision on where home loan rates stand today.
Do keep in mind that buying a property with a home loan is not really a wise investment. Since the bulk of the interest portion is front ended – you will actually end up paying back very little of your principal over the first 5-10 years. So even if the price of your property escalates, your real return after repaying your home loan from the liquidation proceeds will not be very lucrative.
Rental yields, on the other hand, remain quite low in most parts of our country at 2-3%, meaning that you will probably be able to rent a home which has a market value of Rs. 1 Crore for just Rs. 16,000 to Rs. 18,000 per month. A Home Loan for the same property may set you back anything from 4-5 times that amount.
Purely from a financial planning and investing standpoint, it makes much more sense to rent a property and invest your surplus into mutual funds through the SIP route after clearly defining your long and short term financial goals. After all, equities have consistently outperformed real estate over long timeframes.
However, we understand that buying a property is as much a sentimental decision as a financial one; and an important life milestone too! If you chance upon your dream home and are able to snag a good deal on it (and it makes financial sense from the point of not leveraging your personal finances to a point of discomfort), go for it irrespective of where interest rates are! After all, what goes down, comes up – and vice versa.
Abhay Kumar Co Founder and Director at Institute of Real Estate and Finance ( IREF)
In a rising interest rate environment, it's natural to feel hesitant about making a home purchase. However, it's important to remember that there are many factors to consider when deciding whether to buy or rent a house.
First, it's important to assess your financial situation and determine if you can afford the increased monthly mortgage payments that come with rising interest rates. Additionally, you'll want to consider the overall cost of owning versus renting a home, including property taxes, maintenance costs, and insurance premiums.
While rising interest rates may make purchasing a home more expensive, it's also worth noting that home values may appreciate over time. By investing in a property now, you may be able to build equity and benefit from potential appreciation down the line.
Ultimately, the decision to buy or rent a home comes down to individual circumstances and financial goals. As a real estate educator, my advice is to carefully consider your financial situation and work with a trusted real estate professional who can guide you through the process and help you make an informed decision that's right for you.
Ashok Singh Jaunapuria, Managing Director and CEO of SS Group India
We should buy a home when it’s required; though in real estate business increasing interest rates make buying or selling quite difficult on other hand lesser interest rate motivates the process. However, the escalating value of the property which depends on the future aspect like the development of the locality or the area, must be kept in the mind, while investing money in the sector. Renting a property could be a short term plan but owning a house will give you freedom, safety and assurity of a capital investment.
Anshu Agarwal, Global Head of Finance at Branch International
With the RBI increasing the Repo rates, housing loan rates are going up. The interest rates have increased by almost 2% to 3% after RBI started increasing the rates. This has increased the EMI amount for all the folks who have taken home loan.
Since the inflow might not have changed this creates additional pressure on the borrowers. Also, with high inflation it might be a good idea to told on to rental house instead of buying one. Once the inflation pressure eases and the cost of living declines it will be a good time to invest in buying a new house. RBI is confident that the rates will be reduced once the inflation eases out.
Dinesh Bansal, Chairman, UKRealty
Although the home loan rates have risen in excess of 250 bps in less than two years, purchasing a home is an investment that increases in value over time. Your home's equity rises as your mortgage balance decreases. This may be a significant resource for obtaining riches and financial stability.
You must have strong money management skills to make on-time EMI payments when you purchase your own home. Renting is simple, but it becomes more difficult as you age, and purchasing will be heavy on your finances now, but it will get balanced over time as you accumulate equity in your house. Together with wealth growth, owning your own home provides you and your family independence and security. You are free to use it anyway you want since it is your own.
A sense of control over your living environment may come from owning your own house. There are no limits placed on you by the landlord, so you are free to make whatever alterations you see fit.
Furthermore, tax advantages of home ownership include mortgage interest and property tax deductions. You’re entitled to get income tax benefits of up to INR 5 lakhs (combined) under three sections, namely 80EEA, 24, and 80C of the Income Tax Act.Section 24 pertains to a deduction on home loan interest payment (up to INR 2 lakh). Moreover, you can claim an extra deduction of INR 1.5 lakh (excluding the INR 2 lakh from above) under 80EEA on home loan interest. Finally, homeowners can get a benefit of up to INR 1.5 lakh for the loan principal repayment under Section 80C. Some states even give a 1-2% benefit of stamp duty if a woman buys/owns the house.
Ashish Kukreja, Founder & CEO, Homesfy.in
Even though the real estate market has entered a good cycle this decade, many potential homebuyers may be hesitant to decide on whether to buy or rent a house, especially when home loan rates are rising. So, the question remains: should you buy or rent a house when home loan rates are rising?
Nonetheless, buying a property can be a good decision if you are financially stable and have a long-term strategy. In other words, why pay rent when you can pay an EMI and own property?
The prime factor to consider is the current real estate market. In a seller's market, where demand is high and inventory is low, home prices may continue to rise even as interest rates increase. While rising home loan rates may make buying a home more expensive in the short term, it's important to consider the long-term benefits of owning a home.
Let's quickly glance into the benefits of choosing to buy a home over renting:
1. It creates a sense of security and fulfillment in owning a house.
2. Rent is a monthly expense that does not result in the creation of physical property.
3. When you lease, you may need to relocate, which wastes money, time, and energy; but you don't have to move when you own.
4. Real estate investing is a secure investment with tax benefits and potential capital growth.
On the other hand, renting a home may provide more flexibility and affordability in the short term, but you will not be building equity in an asset. Additionally, rental prices may increase over time, making it more expensive to rent in the long term.
Ultimately, the decision to buy or rent a home when home loan rates are rising should be based on your individual financial situation and long-term goals. It's important to consider factors such as the current real estate market, your ability to afford a higher monthly payment, and your long-term investment goals.
CA Manish P Hingar, Founder at Fintoo
Over the past year, home loan rates have gone up a lot. This has made it hard for people who want to borrow money to buy a house. Now, some people who were not sure what to do before are stuck deciding between renting or buying a house. The financial feasibility of each option may depend on an individual's financial stability.
Renting can be a smart choice when home loan rates are rising because it comes with several benefits. As a renter, you can enjoy lower monthly payments, flexibility to move more easily, no property taxes, maintenance costs, down payment, and foreclosure risk. Additionally, renting may give you access to amenities that are expensive to own and reduce your financial responsibility such as insurance. With more disposable income, you can pay off debt, save for retirement, or invest in other assets.
However, buying your own house offers several advantages. Firstly, owning a home builds equity and can serve as a source of wealth and financial security. Secondly, homeownership offers greater control, privacy, and freedom to make changes to the property without any restrictions from the landlord. Finally, owning a home can also provide potential tax benefits such as deductions for mortgage interest and property taxes. While renting may seem easier in the short term, buying a home can pay off in the long term by providing a stable and secure living situation.
Anoop Kumar Bhargava, Chief Executive officer and Director at Empire Centrum
When home loan rates are rising, it's important to consider a few factors before deciding whether to buy or rent a home:
Affordability: Rising home loan rates can increase the monthly mortgage payments, making homeownership less affordable. You should evaluate whether you can comfortably afford the higher payments.
Duration of stay: If you plan to stay in the same place for a short period, renting might be a better option. Renting gives you the flexibility to move easily without having to worry about selling a home.
Homeownership benefits: Homeownership comes with various benefits like building equity, potential tax advantages, and the freedom to make changes to the property, security when faced with situations such as pandemics. If you value these benefits, then buying a home may still be a good option, even with higher interest rates.
Ultimately, the decision to buy or rent a home depends on your personal circumstances and financial situation. It's important to weigh the pros and cons of each option carefully and consult with a financial advisor or real estate professional before making a decision.
Pramod Kathuria, Founder & CEO, Easiloan
Home loans rates have significantly increased in the past months, and hence many borrowers are contemplating whether to buy or rent a property; while renting is relatively cheaper, there are pros and cons to each method
Benefits of Renting
1. Lower Rent – Rent is usually lower than Bank EMIs, hence as borrowers you have less burden
2. Flexibility – Renting provides flexibility in case moving between cities for relocating for work or personal reasons
3. Additional Cost – As a owner you have to deal with property taxes, maintenance cost, which isn’t the case for renter
4. Down payment – If you are buying a property, you have to provide downpayment which may hit your saving/corpus
5. More disposal income – Since major costs are less, you have the benefit of more disposal income which is beneficial in case of emergency
Benefits of Buying
1. Building equity – Buying a house will help you build equity; by investing in assets which appreciates over time
2. Control and Privacy – Owning your own space provides a sense of control over your life, without worrying about the landlord’s restrictions.
3. Tax benefits – Home loan come with a tax benefits, and while magnitude of is not a significant, it is a financial relief to many.
While buying a house a level a financial discipline is required to pay your EMI on time, renting gets more challenging at later stage in life. Buying a house provides a freedom and safety as well as sense of security.
Sanjay Agarwal, Divisional Head - Retail Assets Business, Edelweiss Asset Recontruction Company
Buying a house for self-use is a good decision irrespective of interest rates. Though if the rates are high at the time of taking loan, it will only be beneficial when the rates fall.
Rahul Kalyan, VP institutional sales, LoanTap
The Home Loan market has seen its ups and down in the last decade and the ROI has touched the lowest BPS to the current rising rates.
Property that ticks all the requirements of an individual than even today is the best time to invest and take a loan.
At the same time if you plan to relocate or invest more in other available financial instruments then rental property would be a better option.
Vishal Raheja, MD, InvestoXpert.com
The rising home loan rates have created a dilemma among the fence-sitters of whether to buy a home or to continue with renting. However, whether it’s better to rent or buy a home depends on your personal finance circumstances because both renting or buying a house could have own advantages and sometimes disadvantages.
Hence, understanding the benefits and drawbacks of each option will help analyze consumers’ choices and settle on the one that makes sense for them. When home loan rates are rising, renting can have several benefits, including lower monthly payments, flexibility to move or change properties/locations, waiver of property taxes and maintenance costs etc. On the other hand, one gets some key benefits of buying own house in the form of building equity or an ownership stake, more privacy and tax benefits.
Manu Rishi Guptha, Founder of MRG Capital
Buying a house is not a function of return on investment. The typical adage of “Apne sir pe Apne chath" has been the biggest driving factor for people to buy a house. Considering an average 4% rental yield in India, it doesn’t make economic sense to buy a house when an FD now offers some 6% return.
However, in a country like India where financial literacy is abysmally low, buying a house and holding it for long time gives a very high RoE; E stands for emotion. But when home loan interest rates start rising and when peak out the property prices tend to correct by some 20%.
So a savvy investor is better off by buying a property when interest rates have peaked so that the property appreciation when the interest rate cycle turns will compensate for the lower yields he gets for owning the property and renting it out.
Likhita Darshan Vice President - Marketing & Customer Experience
While purchasing a property, every buyer or investor should consider the tax implications associated with it. Budgeting for property tax is important as property taxes are levied annually and property owners should make a provision for this. Property tax is calculated based on the total value of the property. But there are other factors that guide the valuation of taxes, such as location and the type of property, as in, if the property is in under-construction stage or it is a ready-to-move in property. While the basic equation is the same, when it comes to budgeting for residential vs commercial property taxes, few factors are taken in consideration. In commercial property taxation for example, unit area value system, capital value-based system and annual rental value system play important roles.
Ram Raheja, MD, S Raheja Realty
While the upward journey for residential real estate gained momentum post-pandemic as a preferred safe haven asset, the bull run for the sector has been consistent for 3 years. Incentives like stamp duty reduction and cut in home loan rates did act as further catalysts to the demand initially. However, it was not reliant on external factors alone.
Those who wanted to invest their money were doing so first in the basics; shelter being the top priority. The paradigm shift in the tough process has brought back home-owning in the forefront. People are putting their money where their mouth is and preferring buying over renting. This trend is expected to continue since the forecast remains bullish for the sector.
Chetan Patel, Director, Gurukrupa Group
We have to keep in mind that owning a home comes with certain positives and a few negatives, especially when loan rates are increasing. Higher interest rates will increase overall cost and hence the EMI amount. On the other hand, owning a home not only creates an asset for us but also gives us tax advantages.
Many people prefer to have their own place, especially in tier II & III cities as the EMI and rent almost come in the same bracket. However, if you are staying in a big city where the cost of living is already high, owning a house when the rate of interest is going up can be challenging. Also, having your own house during unprecedented events like lay off or pandemics might give you an advantage over renting.
