Buy a home on loan or
rent?-1
This is the question that concerns
majority of the people who have relocated to other cities following a job or
business requirement - Should I buy the house NOW by taking a loan OR should I
wait for some more time for the real estate prices to come down and interest
rates to stabilize?
You will find different answers from different people
whom you ask this question.
Call up the bank and home loan officer - his
response - "We have excellent discounts available, the interest rates are just
right to take a loan - in future it may appreciate further. Let me know your
details and I'll visit you and explain"
Call up the realtors selling
apartments - their response - "Only 2 flats are left in this building, rest all
are booked and this is the most upcoming and happening areas which will only
appreciate in value. If you miss it now, it will become costlier day by day and
unavailable"
Ask you friend who has already taken a house loan - "You
MUST take a house loan as soon as possible. See, I took loan 1 year back. I got
the possession 2 months back and the price of my house has increased to 1.5
times in just one year. There can be no better investment than house and house
loan. So just go ahead and invest."
Ask your friend who has NOT taken a
house loan and is staying in rented apartment - "Yaar, rented apartment is the
best. No long term commitment and freedom to relocate to any place and in any
city. God knows how long can I keep up my job."
Another friend who has
bought a piece of land or plot - "Forget about house, a house depreciates in
value. Some day or the other the fall will come in real estate. Land only
appreciates in value, irrespective of the market situation. So invest in land,
and later sell it at much-much higher price to buy apartment."
Basically,
all you will hear is the psychological biases of individuals trying to justify
what they have done. Hardly anyone will know anything about the markets - all
have taken random shots for their financial commitments and will be ready to
shout at the top of their voice to claim that what they did was correct and you
should soon follow them by taking their valuable advice.
Now, many-many
articles are available on site like rediff, citing extreme end examples of
people who should take loans and people who should not take loans. However, a
general dilemma can never go away.
Unfortunately, no one can tell what
you should do. It is you who has to take the call. It is you who will be
responsible for your financial obligations if things go wrong and you get into a
financial distress. Hence, take advice from others, but take decisions on your
own.
As a finance professional, I know one thing for sure: No markets, No
Industry, No country can continue to grow consistently with even a double digit
growth. People who claim to make claims of even a mediocre 20% profit from their
stock picking skills are again reminded of how the overall market has
performed.
Now forget about the stock market and its overall fantastic
returns. All of you must have already heard the "Indian Growth Rate ranging from 8% to 10%". If it is so easy to make money, why is the
government, the country still struggling to keep up the growth rate at mere 9%
(not even touching the smallest double digit figure of 10%)?
The reason
is same as cited above. Overall, the profits from one segment are nullified (to
a major extent) by the losses in another segment. A high salary requires
relocation, and the cost of living eats up majority of salary. If you can make
and save more - you are just lucky.
So coming back to the real estate
market - there has to be a saturation level -atleast in terms of the price rise.
If today, the house prices are rising with annual 20-50% range, then there will
definitely be a time when the prices will either fall nosedive, if the MNC start
laying off people (the major customers of real-estate boom) OR atleast there
will be a time when the price rise will be limited in a single digit range. When
will it happen? No one knows. But my finance knowledge and historical data is
sufficient to convince me for this.
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.
