Do you know the answer to who came first – the chicken or the egg? While it’s a debatable topic, knowing the answer to it doesn’t really help us in our lives. Unless you are a scientist. However, for a common man, the decision of choosing between buying or renting is of great importance.
When you are in a dilemma of whether to rent or buy, the right answer for YOU will certainly help you move closer towards financial well-being. This decision isn’t entirely financial. There are emotional aspects involved as well, and buying a house is a dream for many.
Here are 5 factors that’ll help you choose a side in this Rent v/s Buy battle:
- 4% Rule
The 4% Rule is a widely known rule of thumb for choosing between Rent v/s Buy. It’s a fairly simple calculation that lets you know whether your rent is optimum or too high for the property you are living in. The rule states that the annual rent for a given property should be less than or equal to 4% of its value. Here’s an example for you to understand it better:
Let’s say a 2BHK in Pune costs INR 60 Lakh. According to the 4% rule, 4% of 60 Lakh is INR 2.4 Lakh. This is the maximum annual rent that you should be paying for the property. If you are paying anything more than this, consider renting another apartment or buying altogether.
On the flip side, if you own the same home, what shall be the dynamics? Let’s check that out as well.
The amount of rent that you can earn annually from a property in metro cities lies between 2-3% of the property value. So your house in Pune will yield you an annual rental income of 1.2 to 1.8 Lakh, with 2.4 Lakh being the maximum.
If you invest in a Tier 2 city with growth potential, it can fetch you a rental income of anywhere around 5-6%. Also, the resale value will be significantly higher. Hence, from an investment point of view, buying a property in a city like Dehradun is a wiser choice. Check out Address India’s website for properties in Dehradun. https://addressindia.in/ - Debt-Income ratio
The debt-Income ratio is essentially the percentage of the debt you have with respect to your income. Many financial experts recommend that your Debt-Income ratio should always be less than 40%. This ratio has a correlation to the famous 50-30-20 rule, which states that 50% of your income should go towards your basic necessities, 30% towards your wants, and 20% towards your savings.
When you compare both the rules, you can infer that if your Debt-Income ratio is 40%, you’ll only have 60% for your necessities, wants, and savings. This puts a lot of pressure on you to manage your monthly expenses. If you have no existing debt, you can definitely think of buying a home. However, if you do have some existing debt, you’ll have to manage your expenses to accommodate your home loan EMI and keep the Debt-Income ratio below 40%. - Rate of interest
Historically, the interest rates on home loans are at an all-time low. The interest rates have come down from 8% to around 6.5-6.6% levels. Considering how even a 1% increase or decrease in the rate of interest has a huge impact on the total amount that you end up paying, these are lucrative times in terms of home buying.
Let’s take an example to understand this better:
For a home loan of INR 50 Lakh at a rate of interest of 8% for a tenure of 20 years, your EMI will be INR 41,822. Over the course of 20 years, you’ll end up paying INR 50,37,281 in interest.
Now, for the same loan amount and tenure at a rate of interest of 7%, your EMI will be INR 38,765 and you’ll end up paying INR 43,03,587 in interest. 1% drop in interest rate is saving you approximately 15% on interest payments.
With more and more banking institutions offering easily accessible home loan services coupled up with low rates of interest, the time is right to buy. - PMAY
Pradhan Mantri Awaas Yojana (PMAY) is a scheme introduced by the Government of India to promote affordable housing. The scheme offers you an interest subsidy depending on your income slab.
There are 4 categories under PMAY: EWS, LIG, MIG I, and MIG II. The interest subsidy offered on categories EWS and LIG is 6.5% for a tenure of up to 20 years. The interest subsidy is provided for a tenure of 20 years at a rate of 4% for MIG-I and 3% for MIG-II. The subsidy is subject to a maximum of INR 2.67 Lakh.
The date to avail the subsidy benefit for those falling under the EWS and LIG categories has been extended to March 31, 2022; while the deadline for those in the MIG-I and MIG-II categories expired on March 31, 2021. For more details, check out https://pmaymis.gov.in/ - Remote working
The pandemic has resulted in a rise in remote working. Subsequently, the workforce has seen reverse migration over the past two years. People are moving back to their hometowns since it’s saving them a lot of money on accommodation, which is a major chunk of our monthly expenses.
Thus, remote working has given a boost to home buying. People are looking to buy bigger houses to accommodate their remote working set-up. All in all, if your job allows you the flexibility to work remotely, you should definitely consider buying a house.
There you go! 5 factors that’ll help you in choosing your side in the Rent v/s Buy battle.
We hope that the breakdown of these 5 essential factors will help you in sorting the dilemma of whether to rent or buy a property and make a sound decision for your future.