Monday, April 20, 2009

SHOULD I BUY OR RENT HOUSE?

One of the classic dilemmas haunting lot of people is the issue of buying versus renting the house for accommodation purposes. Some experts feel that buying a house is the better option as it helps you create an asset in the long run, while some believe that renting is better option considering the prohibitive rates realty commands these days. And by renting one can save money by paying rent which will be lower than the home loan EMI and these savings can be invested for long term wealth creation. So both arguments have their own merits and none can be dismissed easily. Both of them have their own benefits and shortcomings. So, before we decide on which way to go ,we need to fully understand the pros and cons of each of these options.
BUYING HOUSE
PROS OF BUYING

- It creates an asset for you in the long run.

- You don't have to pay for your accommodation after you pay off your loan, which is maximum of 20 years, unlike,in renting where you have to pay monthly rent for every month till you continue to stay in the rented premises.

- You also get income tax benefit. Upto Rs1.5 lakhs of your interest component paid in the year on your home loan is deducted from your taxable income and Rs 100000 principal repayment is also tax free. The same benefit is also available to your spouse in case you decide to go for joint loan for the house.So the total tax able income deduction benefit possible on your home loan could be a high as 5 lakhs for both the spouses.

- House may be used for generating income under reverse mortgage post retirement.

- No hassle of changing house every 11 months,unlike in rented accommodation.

- Fulfills the dream of having roti kapda and makaan.


CONS OF BUYING

- The monthly outgo in the form of home loan EMI is generally higher than the rent.

- Demands long commitment towards EMI payment. You have to commit a large portion of your income towards monthly payment of EMI for a relatively long period of time like 10-15 years or even 20 years. This limits your ability to meet exigencies and financial emergencies.

- Once you buy a house , you give up the flexibility of moving to another locality in the same city or to another city. You are stuck with that locality for ever,unless you decide to sell it off ,which is long and cumbersome process.

- Ownership of house also comes with high bills like society maintenance charges etc which have to be paid monthly/quarterly etc. This can feel like paying rent after buying a house and be very annoying for few.


RENTING HOUSE

PROS OF RENTING

- Lesser financial strain as monthly outflow is lesser.The rent paid for a house is generally much lesser than the home loan EMI paid to buy a similar house.

- Offers flexibility of choosing neighbourhood as and when desired,unlike with self owned house.

- No long term commitment of paying EMI.In case of any financial stress one can always stop paying rent ,if its higher, and move to a smaller place which has lesser rent. This is not possible with self owned house as the EMI is fixed and has to be paid every month .


CONS OF RENTING

- The money paid as rent is an expense unlike EMI which builds an asset.

- Lower IT benefit for money paid towards rent as against money paid towards home loan EMI.

- Forced to change house every 11 months and pay brokerage for new house on rent. This has both financial , emotional and practical difficulties. Changing house every now and then can throw off your social life out of gear. Your kids might have to shift to new school etc unless you manage to find another house in the same locality.

- No income possible post retirement, unlike with self owned house which does offer an option of income through reverse mortgage.

SO WHAT SHOULD YOU DO?Well you must decide for yourself depending upon your need . I would say you should go for buying a house as its pros far outweigh its cons. However, you may consider renting as well in case you cant afford to pay the EMI of the house that you want or are not sure of the certainty of future cash flow .for example if your job etc is not stable.

3 comments:

  1. Its like you read my mind! You seem to know so much about this, like you wrote the book in it or something.
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