Buy a home on loan or rent?-2: Finance Trading Times

Buy a home on loan or rent?-2

This is part II of the article Buy a home on loan or rent?. Please read the first part before proceeding with this one

So unfortunately, the dilemma continues. But just take an example as cited in my previous article. You decide to buy a flat costing 40 lakhs. You get 32 lakhs as loan from the bank. Rest 8 lakhs you put in from your own kitty. The EMI typically comes to around 30,000 per month for 20 years. So for 32 lakhs loan, you return to the bank an amount = 30 K * 12 months * 20 years = 72 lakhs.

This amount is double the amount of money you are taking from the bank as house loan

Off course this has to be repayed over a long duration of 20 years so DCF analysis will lead to a lower amount, but this figure tells you the cost of loan. But is it really worth taking a loan when the bank is earning more than double the amount from you? More so, in the world which is full of uncertainties – about your job, your salary and everything else?

Also, don’t forget that 8 lakhs you are paying from your pocket. Ultimately, if everything goes well for 20 long years – one fine day you will become the real proud owner of your house, maybe when you reach in your forties or approaching 50. During these 20 years, you would have lived with either of the two:
• A bit worried look about job and salary uncertainty – due to your home loan commitment OR
• An ignorant belief and worry less life if you want to keep yourself ignorant about your home loan & your uncertainties

To me, majority of (sane) persons would be forced to live with option 1. Add to it the increase in cost of living due to marriage, kids, their education, elderly parents (their medical care) and so on, and things will keep looking difficult (may not be difficult in reality, but due to the commitments).

Ultimately, it all depends upon the individual – how he takes it. People will have all kinds of flashy words & phrases – “Positive outlook towards life”, “Taking up the Challenge”, “Doing something on my own” and so on, the fact is that in case of a financial distress (if it occurs), you will be left all alone. The same friends who advice you will no longer be willing to see you and you will have to face the situation on your own.

Take a step forward:
Instead of taking the house on loan now, go for a rented one for a period of say 10 years. In an IT city like Hyderabad, a typical 2 BHK flat would cost 8 to 10 K per month. Assume that you start with 9K and your house rent increase each year by 10%. So overall, during these 10 years, you would pay to different house-owners a total of 17.2 lakh Rs. (Round it to 18 Laks)

On the other hand, during the same 10 year period, if you had taken a housing loan, you would have repaid to the bank half of 72 lakhs – i.e. 36 lakhs and 8 lakhs upfront from your kitty = total 44 lakhs. Of course you would have become part owner of your house in this case.

So, in case of renting the apartment, you save 44 – 18 = 26 Lakhs as compared to buying one on loan.

Even if the real-estate prices keep on increasing at a rate of 8% each year, the house costing 40 lakhs today will cost 80 lakhs after 10 years.

So think about buying the house then. Will it be a better option? Let’s see:

• During these 10 years – you’ve lived freely – no commitment – no worries
• If you loose your job, you pack up your bags and go back to your native town.
• If you are still able to keep up your job for 10 years – that means you are worth it. However low, you can still expect atleast a 5% salary hike each year. That will add to your accumulated savings, which will severely reduce your loan amount.
• You can take decision on “Take things as they come” basis
• Your rent savings will be more, if instead of paying an increased rent, you opt to move to another apartment of same rent or low rent.
• You don’t have to worry about any kinds of problems that may be linked to a house purchase and its later consequences as mentioned about the risks with a house purchase in this article
• If the reality markets go for a correction, you will have the option of buying the similar flats with cheaper price levels – anytime during the 10 year period – meaning more savings in future than present day high price purchase
• In the 10 year period, you may move around 3 time to 3 different houses. It’s not that difficult to find a house on rent

Nothing in this world comes without risks and compromises:
• You will have to keep moving to other apartments if the rented house or house owner is not good (Independence for some, problems for others)
• You will have to think carefully about your family (if married) and plan your family developments
• People usually do not appreciate a family man living in rented apartments for long. One may have to face it. However, the benefits of postponing the purchase can be a major beneficiary

Ultimately, the choice is yours. You have to fight against the variations in the markets. You have to take the decisions on till when to rent and when to buy. If buying then is the market really low or can it go down further.

I may have missed some points in the calculations above. Some assumptions may be faulty. However, the essence that I want to convey is that just don’t forget that loan is very-very costly. Avoid it as much as possible. The mental tension that one gets once he’s in debt cannot be explained. His negotiation power reduces, he cannot switch job and move to another city easily, he starts worrying about the job, its’ security, the family, kids and very simple liabilities add up.

Hence, take the minimum possible loan. Live a happy and stress free life. Use your own money. Leave the OPM concept to banks and brokers (OPM – Other people’s money –like the business of MF managers, brokers, etc.) OPM is not for people without financial background.
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12 Comments: Post your Comments

Anonymous said...(on 27 November 2007 at 00:05 )  

Hi Shobhit,

Lovely article. Thanks for the detailed info.

Just want to add one more point to the list of benefits of renting a home:
You get interest on your savings - the compunded returns of your savings will be much-much higher, that will add to your buying power later.

From the Frying pan into the fire!! said...(on 27 November 2007 at 00:15 )  
This comment has been removed by the author.
From the Frying pan into the fire!! said...(on 27 November 2007 at 01:47 )  
This comment has been removed by the author.
Shobhit said...(on 27 November 2007 at 01:51 )  

Thanks for your comments "No Escape". And thanks for your suggestions on wishing that I can do better.

I too read your article - could not understand what your complains are and who do you believe is responsible for it - Is it your ignorance about the banking and loan system or is it that you did not understand the terms better while signing up for the loan. It's always easy to complain about the authorities like RBI. Private banks are not charging anything as per their own wish, it's the ignorance of we ignorant borrowers which allow them to do so. And yes, as long as you sign the agreement, it's perfectly legal, so RBI also cannot do anything.

Somehow, I've also started feeling really negative :-), after receiving so many similar comments.

I am now feeling sick of responding to such "Why are your thinking so negative, why are you against stock market, why dont you believe in taking risk" type of questions.
I have a different outlook - even if I sound NEGATIVE, I do offer an alternate route. In this present article, I took 2 things, taking a loan and then compared it to renting an apartment. If the reader is in the grip of survivorship bias and his own personal biases which force him to look only at my articles as being negative towards home loan and ignore the alternate and better parts of the articles, then I cannot help.

As you rightly said, take what you want and act accordingly.
Loans are loans they come at a big cost that is hard to realize - you mentioned that you've taken "n" no. of loans. I hope you are utilising the loan money to its full potential.

All the best.

From the Frying pan into the fire!! said...(on 27 November 2007 at 01:55 )  
This comment has been removed by the author.
From the Frying pan into the fire!! said...(on 27 November 2007 at 02:02 )  
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Anonymous said...(on 27 November 2007 at 03:00 )  

Hi George alias No escape,

What kind of non-sense is this? In your blog, you say that you have taken loans "I too have taken loans – educational loans, home loans, vehicular loans etc. " and in the comments here you are mentioning that you have only house loan. Are you trying to make a fool of the readers by jotting down incorrect info in order to justify your point?

If you believe that you have been cheated, approach the consumer court. May be it takes 3 years to get justice in consumer court, at the end you will get compensated, if you are correct. The fact is that you wont have any guts to do that - same old cheap indian mentality. Keep bikering, keep complaining and do nothing.

It appears to me that you are trying to promote your blog by putting links to it on this famous blog of Shobhit. Anyways, your hopeless article is not even 1% quality of the articles on this blog. So please sit silently, and kindly do not start advising stalwarts like Shobhit on "how to do things better".
The loan business is flourishing because of people like you being made a monkey of their money by the banks. So keep taking the loans and live under the false impression of "Positive outlook" and "Risk taker"

Shobhit - please do not allow such promotional comments on your blog. They should be disabled completely.

nickp2 said...(on 27 November 2007 at 05:01 )  

Hi Shobit,
This article was too good.
I had read such an article about 1.5 years back in a sunday times of india edition where the author had explained how renting a house is better than taking a loan.But ofcourse each decision has its own pros and cons.There is no way you can turn time backwards and change your decision.But it is always better to not be under any financial obligation and lead a peaceful life.Shobit could you also cover something about the high oil prices as well as the dollar weakness and how it affects the economy?Also which way do you think the dollar is headed in near future?Once again thanks for such educative articles.

Shobhit said...(on 27 November 2007 at 19:45 )  

In English, there is a saying: "Idiots buld the house and gentleman rent and stay in it". :-)

It's probably the western culture where one does not have a big family and ppl believe is staying alone, no much liabilities and take things as they come.
IN India, however, things are completely different. So all you need to do is analyse your situation properly and take decision accordingly. The same liabilities for which your are taking loan for the house will become multiple times burden if things go wrong wih your financial situation.

Please Note that I am NOT advising you against buying the house - all I am attempting to convey is that DO IT AT THE RIGHT TIME when the prices are right. Dont jump on just because everyone else is doing it.

From the Frying pan into the fire!! said...(on 27 November 2007 at 21:12 )  

Mr Anonymous et All,

Mr Anonymous, cant u even leave a name?? Would have given u a bit more credibility. Below some answers to ur queries.

Point 1) No im not trying to "promote" my blog. I blog very rarely. so no Qn about promoting a blog. and its a very personal blog. (like i said, i dont blog too often). and even if i do write, i send it to family and frinds.

Point 2) Dont know y u got so worked up about my blog article. If i dint value Shobit's way of putting across things in a better way, i wouldnt have put the link here for him to get the point out across to ppl like YOU(!!). Infact i was askin him to rewrite the article in a better way!! Copy paste of part of my exact first post --> "Im sure u can do better. Hope you will take it to your readers by explining things better.

Point 3) I had infact mailed him on his blog email id last week with the link and promtly got an auto reply asking me to post comments on the site!!! which is why i did...

Point 4) In my blog i said i HAD edu loan, vehicle loan etc etc.. right now ONLY a home loan. Kindly note that i do not need you to make judgement on me and my finances.

Point 5) Yes, It is out of my own experience with my first (read again, first and only) vehicular loan that i got thinking of it and wrote that article so as to warn ppl like you (!!)... if u want to take the point, pls do. And if u do know this already, good for u. i know that a majority of ppl out there dont. so the article is meant for them. And again, not promoting my blog. I would love for Shobit to put things in a better way.

Point 6) I think we can all understand who is the bitter bickering one here. If you read my blog properly, i had mentioned that i do not take (and no one lese needs to) nonsense from these loan ppl. there are upteen number of banks to give loans according to atleast few of our conditions IF ONLY you persist.

Point 7) I think Shobit can make the judgement on which comments need to be there in HIS blog. :)

Thanks and Regards


From the Frying pan into the fire!! said...(on 27 November 2007 at 21:41 )  

P.S Mr Anonymous,

Ive deleted my prev comments so that u can rest in peace and ur BP does not go thru the roof!!! :)

Shobhit said...(on 27 November 2007 at 21:59 )  

Come on guys, dont just start fighting with each other like this. :-)

George, please dont remove your comments - they are absolutely fine!

If everyone has the same opinion and thinks in the same way, the world would be a much better place. Then there will be no need for financial decision making and financial blogs. Let everyone openly speak up and raise concerns.

Mr. Anonymous, I agree with George that there should be some decency in comments.

I've thought many times of moderating the comments, but it is not possible for me due to the busy schedule.
The next time I find a nasty and offending comment targeted towards any individual, I will simply delete it.

Enjoy the blog in the right spirit :-)


Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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