Replacing rental cost with home loan EMI

Home purchase is not just one of the important larger goals, but it is also a very emotional one. While owning a house is a dream for many, owning a dream house would cost even more. So, how could one decide when to purchase or rent a house? Like with most money questions, there’s no one universal answer. Especially when the house is primary i.e., for consumption or to occupy, the emotional factors weigh in lot and are compounded with inputs from family, friends and peers.

Especially for younger couples, it’s one of the most enduring and emotional investment. among those who migrate to cities for work, they would love to occupy a new house of their own at their favorable locality. It’s also an in-built Indian psyche that the post-education life cycle of an adult is a sequence of job, marriage, house, kids and retirement. It’s not just the order of timelines but also of priority in most cases.

There’s also another angle to the calculation that in some cities, the rental cost could be substituted with an EMI of a new house. This allows the individual or family to own the house while expending an equal or nearby amount that they otherwise would’ve done for staying in a rented accommodation. However, the choice is not just about economics, though it’s important for to consider that perspective.

One needs to consider the type of profession one is engaged with, if the occupation has frequent relocations, then it would be difficult to anchor at one place alone. Moreover, as the children grow up and due to their educational needs, if the family must opt for a particular location within a city or a city, then accordingly the decision changes for owning a home. Then of course, the finance angle. It’s an expensive proposition and one must prepare well for the funding along the timelines to service the loan.

While the financing options and their choices have improved, one must consider their capacity to commit to those timelines. Then there are individuals who use house as an investment. One aspect of this logic was to be cleared for everyone. A misinterpreted perspective is to consider consumption to an investment i.e. when an individual is purchasing a house to stay, it shouldn’t be considered as an asset. This is again a traditional way of looking at using the house to fund future child education needs. As long as the rental cost could be replaced with a house loan EMI, opting for a house makes sense. But to own a house in or near an up-market location would strain the entire finances of an individual. So, a judicious decision must be taken when purchasing a house.

The sense of achievement and security of owing a house is probably no match to many of the other financial wealth models, but in many cases decision for a rented house would turn a practical one. Also, a case in point is when one would want to sell it and mayn’t end up getting a return on it or the valuation turning negative to the original cost. The biggest hurdle in a house is its illiquidity, also could anchor you to not to take any bold decisions of job switching or entrepreneurship due to the home loan hurdle or locational disadvantage.

The better way to solve this is by checking if the current cashflows have enough buffer to accommodate the other major financial goals like children needs and retirement. Also, any decision to purchase of house shouldn’t catapult the existing cashflows and create stress on the personal finances. Priority of construction of house shouldn’t, in essence, supersede the other important goals and most importantly the dilution of emergency funds.

Also, not always one ends up with great returns and people usually get enamored by looking at the absolute numbers when they look at the valuations. But in many cases, the returns translate to about 8-10 per cent annualized while the rental yield doesn’t exceed four per cent. There’re costs of maintenance and upkeep or tenancy management that adds up to the cost of the ownership which sometimes we discount. Of course, I’m not against purchasing a house but one should be aware of how they prioritize and address this need.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])