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:-
- 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.
- 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.
- 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.
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.
SG Estates Ltd.