The decision of buying versus renting is not easy. It takes a lot of financial and emotional planning. Homeownership is a matter of pride for some people, whereas others like to live in rented houses to avoid long-term financial commitments. It wasn’t easy to buy property in the decades gone by, and people preferred renting. But, thanks to home financing, it has become much easier now.
Now comes the most important question: what’s the right decision? Buy a house or rent it? Several factors play a role in this decision. Here are some things which might help you decide based on your financial goals.
When it comes to buying your own house, you have two options. You either arrange the funds yourself or take a home loan from a financial institution. With any level of self-funding, you’ll still need to have saved at least 40-50% of the base price of the house you plan to buy. You can borrow the rest. With the loan, you need a regular source of income to pay the home loan EMIs. If you have the savings and the income stability, you can buy. If not, you should continue renting. It would be good to take time to build a credit history and increase savings that would allow you to own a home whenever you’re ready for it.
Commitment vs Freedom
Leasing a house gives you the freedom to move around. But if you do not want to move around, living in a rented place may be a pain if you are asked to move. Your lease may be expiring, you may want something better, or your landlord may be selling the property and asking you to vacate. Rent also keeps on increasing and if your income isn’t rising in tandem, you’ll be forced to the outer limits of your town in search for a cheaper place.
On the other hand, buying a home gives you stability. “You can remain rooted in a place. Your EMIs may be much higher than rent, but they will remain the same year after year. Buying a home also needs you to be financially disciplined to pay your EMIs on time. Therefore, renting is easy now but gets harder later in life, and buying will shock your finances now but get stronger with time as you build equity into your home. Living in your own house gives you and your family freedom and safety besides capital appreciation. It is your property, and you can enjoy it the way you like it,” says Adhil Shetty, CEO, BankBazaar.
How long will you stay in one place?
If you are clear about your requirements, it becomes easy for you to decide. For example, if you are going to stay at a particular location for a very long period, 10-20 years, it makes sense to have your own house if you can afford it. You can compare your rental costs versus EMIs. But if your work requires you to keep shifting, renting is better. Renting also allows you to have accommodation at a low cost, which frees up your income for investing and wealth creation. Buying a property for a short duration and reselling it when you shift is difficult. Real estate is illiquid and cannot be disposed of easily.
Income and higher credit score
Buying your own house on a home loan needs you to pay EMIs on time. You have to have regular income and stable employment. You also need to have a contingency fund to serve your loan EMIs for 6-12 months, lest you have a problem such as a job loss. “However, if you are into a temporary job or have irregular income, it’s advisable to live on rent till you become financially stable. You also need a good credit score to borrow at an affordable interest rate. If your score is low (under 750), you may need to work on it before taking a loan. Without a good credit score, your loan may become expensive, and in the worst case, you may not get the loan at all,” informs Shetty.
Consider opportunity costs
Home buying is one of the most important decisions of your life. It requires a consideration of your opportunity costs. You might be financially capable of buying a house, but the decision to buy the house may come at the cost of other life goals, such as educating your children. Evaluate how the decision upsets other aspirations. You may still need to go ahead and buy the house. But you’ll need to find a way to balance the opportunity costs so that your other goals are also achieved in due course.
In summary, take a long-term view of buying and a short-term view of renting. Buy when you have the savings, credit score, and income stability and the clarity that you’re going to remain rooted to one place. Till then, rent.
*To buy a home, you have to arrange the funds yourself or take a home loan
* By buying a house, you build an asset that appreciates in value over time
*The decision to buy a house may come at the cost of other life goals
* Take a long-term view of buying a house and a short-term view of renting it