Rent Vs Buy - What to opt for?

In 2004-05 the Bank rate of interest were 7% and from then on till 2012-13, there was upward movement in rate of interest and tax sops were lower - which led to higher EMI/ Rent ratio. However, people still bought real estate because they were enjoying 10-12% annual appreciation in the price of the house.

The 'rent versus buy' decision depends on the difference between EMI / Rent ratio and property appreciation rates. People prefer to rent a house when they pay substantially less as rent than what they would be paying if they were to buy a house on loan.

At present, the rate of interest is falling and so are the drastic cuts in property prices. It definitely doesn’t make sense to purchase a property and give on rent as an investment as EMI/ Rent ratio is too high, as the rents have reduced due to supply glut. A further fall in home loan rate would make it affordable for people to buy a house to live in (as against for investment) than stay on rent.

A house in Noida (part of Delhi NCR) would cost about Rs 90 lacs from a reputed builder and your rent for the same place will be Rs. 26,000. One would have to pay an EMI of 62,000 assuming 80% loan of Rs. 72 lacs. So a < 2.4 times EMI / rent ratio the same person may prefer to buy. Some factors deter people for buying like do they have or can they spare Rs. 18 lacs down payment and the 5-7% stamp duties and overheads costs. But if they can and a purely consumption purpose house is worth the buy decision today as after adjusting for tax sops, to move from a rented to an owned house is a better return on investment. A house owner (loan borrower) factors in the tax breaks that he gets for up to Rs 3 lakh (Rs 2 lakh as interest under Sec 24 and Rs 1 lakh as principal repayment under Sec 80C. So by effectively savings Rs. 25,000 on tax breaks and saving Rs. 26,000 on rent one effectively pays Rs. 11,000 incremental amount and upgrades from a rented to own home.


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