Vikram Sethu, a software engineer moving to Bangalore for work, wondered what he should do about his accommodation. Having studied and then worked abroad for the last few years, he returned to India for work with IBM. With a family in Chennai, a demanding job with a princely salary, his only concern was his living arrangement. Not the lack of options for him, but rather, like most intelligent and savvy professionals of today, he wanted to be sure he was making financially prudent choices.

Having posed this question out loud, each friend had their own advice to give, mostly based on their experience. “You should stay on rent, it’s amazing, hassle free, move when you like, no maintenance problems, and your financially free too” said one whose been staying on rent for the past few years. “Trust me. Buying a house is the best, take a loan now and take the plunge, the prices will only get steeper. Plus no moving every 24 to 36 months, no landlord to bother you, and a place you can do up the way you like and call your home. Also, it’s always good to own your own house”, piped out another friend who had just recently “taken the plunge” as he calls it, having bought a new house on loan.

The reasons cited for each option were true. Both seemed to have their advantages and drawbacks. But none of them really managed to answer the question effectively. For, the financial prudence, that Vikram desired, was lost amidst these other non-monetary points. To think about it, the question of whether staying on rent is better than taking a loan to buy a house, is quite a debatable one. Spanning across various details, one can often get lost amongst the confusing world of real-estate. However, if one is to look at the figures and nothing else, then it will be clearly noticed that each option is financially better under a certain frame.

Helping you figure things out

Vikram had Rs 18 lakh from his savings that he was willing to use for his housing arrangements. Looking for a fairly decent place to move to, the options before him gave him some ideas of how to go about making this decision. The table used, does have a few assumptions made, these have been explained and do not change the equation in any way. The loan amount of 80% of the properly value, may not be given by all lending institutes.

A lot of it depends on the property selected and the credit history of the customer. This loan amount can vary from anywhere between 50-85% of the value of property.

Also, here, the down payment for the loan money saved has been used in an investment opportunity giving a return of 12% per annum compounded for 21 years. Hence, even if the return earned would be higher then 12% in 20 years, the outcome would still be unchanged. The down payments to be made on rentals have not been taken into account, as the difference caused by it will again only be marginal, essentially lowering the amount of money saved on rent over 20 years. The EMI seems to be considerably more than the rent per month, and if one were to use the difference between the two in a SIP for 20 years it should technically favour rentals.

However, the point to be noted here is that since the rent is increasing every 36 months to 5% of the capital value, somewhere in-between the 9th and 10th year, the rent becomes more then the EMI, thus negating any profit that could arise out of this. As far as tax implications are concerned it would be purely speculative as one has no way of knowing how the tax laws will change in the next 20 years, and nor are there any economical trends to help one make an informed decision. The difference however as per current laws is very minimal, and leans in the favour of a loan.

As far as the capital appreciation rate goes, Sandalwood Residential Services, Jones Lang Lasalle Meghra, a company tracking real estate prices and analysing the property markets provided the property prices of various metros and developed cities in India. With the help of these the average capital appreciation rate of 15% compounded annually was derived.

The final deciding factor after one goes through the figures should be the capital appreciation rate, of that area, which should be calculated keeping in mind a span of 12 years. That is a property cycle, and it should span from top to top, or bottom to bottom of the price cycle. Another factor is the number of years, if a person intends to stay in that place for only 5-8 years at most, a rent is a better option, as the monthly money saved on rent over loan, could be used in a SIP to earn a healthy return.

However, in the long run, the rent payer will lose almost Rs 40 lakh, while the loan taker would stand to gain about Rs 1.7 crore. Now having got the equation in order, Vikram and all those having a similar problem can finally make the smartest choice, suited for them.