I am also ignoring the large upfront security deposit paid for rental properties.Īssume you will pay 25% from own pocket and will take a loan for the remaining amount. I am ignoring the tax benefits on HRA and home loan repayment too. Let’s ignore stamp duty and other ancillary charges for possession or even the maintenance charges that you will pay subsequently. Therefore, for you to buy a similar property, you will have to shell out Rs 40,000 X 12 ÷ 2.5% = Rs 1.92 crores. How much loan? The rental yields in residential real estate are about 2-3% p.a. Let’s assume the choice is between paying rent of Rs 40,000 or buying a house on home loan. RENT TO THE OWNER Monthly rent payments start off low (due to current low rental yields) and keeps increasing by ~5-10% each year RENT TO THE BANK Interest paid on the home loan starts off very high and keeps decreasing each month Any excess (Rs 65.8 lacs) goes towards interest payment, or in other words, rent on money borrowed from the bank. In fact, over the course of 20 years, if the interest rate were to remain constant and you didn’t make any prepayments, you will pay 240 X 48,251 = Rs 1.16 crores to the bank. The interest paid is essentially the rent that you have paid on borrowings from the bank. Despite paying Rs 48,251 in the first month, your loan outstanding stands at Rs 49.93 lacs. However, when you pay the first month’s EMI, the outstanding loan goes down by only Rs 6,584. You must pay Rs 50 lacs to the bank to completely own the house. When you pay the first month EMI, Rs 41,667 will go towards interest payment and the remaining Rs 6,584 will go towards principal repayment. Let’s say you take a loan of Rs 50 lacs at 10% p.a. įor the sake of completeness, I will include an example here. I have discussed the calculations behind EMI is detail in this post. Thereafter, the remaining amount is used to reduce the principal amount. First, the interest for the month is recovered from the EMI. When you pay an EMI, then the entire amount does not go towards the repayment of the loan. When you take out a home loan, you pay rent on the money that you have borrowed from the bank. The only difference is, when you rent a house, you pay the rent to the house owner. You pay rent even when you borrow money from the bank. In my opinion, purely from mathematical perspective, this is not a correct statement. Why not adding some money and pay the EMI? After a few years, you will also own this house.” A common refrain is, “You are already paying so much rent. Should you stay on rent or buy a house on loan? Many of us think of house rent as a waste of money.
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