Reality Bytes

Reality Bytes

06 Sep, 2014

A question  arises whether to  opt for  Home Loan  or to go for  rented house.  This dilemma arises normally in the mind of salaried people where monthly  salary is in the range of Rs. 50,000/- and above.

As per  existing  norms of the Banks, it is easy to get a loan upto 80% of the  total value  of the flat/house and people  go for home loan after making payment of  20%  of value  of flat  up-front, where after monthly  EMI of loan sanctioned by Bank  are  deducted/paid.

Broad  Reasons  which are in favour of raising  Home Loan ( i.e. re-payment by EMI)   vis-à-vis Paying monthly Rent:-

  1. Home Loan Repayment both Principal & Interest are exempted from Income Tax  to the extent of  limits specified earlier  1.00 lac & Rs. 1.50 lacs now

increased to Rs. 1.50 lacs and Rs. 2.00 lacs.

 

  1. Interest income  on savings  is taxable.  If taken into account the inflation also real interest incomes  some time  is   nominal  or  negative some time. 

 

  • Historically, the value of property appreciates and in 5-6 year’s span of time  it is doubled.

 

  1. EMI leads to habit of forced savings and forces prudent spending from income.

Just  to take an example a person ‘A’ purchased a flat in Group Housing Society  developed  by SG Estates Ltd.,  in SG Impression, Vasundhara, Ghaziabad in the year 2009 for a  total cost of Rs. 50,00,000/- and after  paying  upfront 20%  raised  a loan of Rs. 40.00 lacs for a period of 25 years,  At the  prevailing rate of interest  the monthly EMI  worked out to Rs. 40,000/- P.M. i.e. Pay out towards monthly re-payment for Home Loan is  Rs. 40,000/- and   house/flat is self occupied.

 

Had ‘A’  not gone  for purchase of property and  preferred to live in a rented House, average pay out  towards rent for a flat of the  size purchased Super Area approx. 1960 sq. ft.,  would be 18000/- p.m. Further  rentals go on  increasing every year @ approx.  10%  as per  rent  Agreement clause.

 

                        Pay Out

                                                                                    Rent

            EMI     Rs. 40,000/- x 12                     = Rs. 4,80,000/-          Rs. 18,000/-

            Pay back by way of

            Claim in Income  Tax 80C & Int.       = Rs.  2,00,000/-

                                                                        ——————–

                                                                        = Rs. 2,80,000/- 

Total Pay out  of EMI  works out to Rs. 23,330/- p.m. against  Rent of Rs, 18,000/-

which means excess  Payout of Rs. 5333/-  approx. as compared to rent have been  per month.  As against which, if we look into the appreciation of value of property which has taken place over a  period of approx.. 6 years , it has  doubled from 50.00 lacs to  Rs. 100.00 lacs.  Also owning a flat has resulted in improved Social status of ‘A’ in the Society.

Above example shows  it was  prudent for ‘A’ to go  in for  Home Loan  i.e. Payment of EMI as against Paying rent.

Another trend coming up in Metros also speaks in favour  of EMI  vis-à-vis  Rent.   While posted in Metros younger generation instead of going in for  taking a property  on rent  buy a flat  on loan from Bank after making upfront Payment .  And once they have to leave the City due to switching over of job, sell off  the existing property, Pay Bank loan.  Siphon of profit  due to appreciation in value of property during this period and park  in Capital Gain A/c  to  lawfully avoid  tax liability.   Again buy property  in the new city/town  where  they go with the  corpus  built up in Capital Gain a/c  as upfront  payment.

In nut shell, my observations are it is always advisable /recommended to go in for purchasing  a flat/house, with  in one’s budget as against renting  a house.  There  might be  excess marginal higher  Pay out form monthly income vis-à-vis  rent  initially,  but  in long  run one is  gainer,  besides  elevation of  social status and per  force developed  habit  of  savings.

 

Gopal Mittal

SG Estates Ltd.

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Residential

SG Oasis

Sector- 2B, Vasundhara

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Rajnagar Extn. Ghaziabad

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Vasundhara, Ghaziabad

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Govindpuram

     
 
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