Rule: It is always better to buy a house and pay an EMI to create an asset than to live on rent.
Exception: If the property market is overheated and home loan rates are very high, it is better to live on rent till the property prices drop to realistic levels.
15-20 is the percentage correction expected in property prices over the next 12-18 months. In certain places, where there is an oversupply, the prices have already dropped by about 20%.
2-3 percentage points is the drop expected in home loan rates in the next one year. SBI is already offering loans at 8%, compared with 11% by other lenders.
| Property prices more than doubled between 2003 and 2008 while home loan rates have risen from 8% in 2006 to about 11% now. But rentals have not risen at the same pace. A Rs 60-lakh apartment can be rented for Rs 12,500 a month. This makes renting more cost-effective at present. | ||
| March 2009 | March 2010 | |
| Price of property | Rs 60 lakh | Rs 57 lakh (assuming a 5% correction) |
| Down payment | Rs 12 lakh | Rs 17.3 lakh |
| Loan | Rs 48 lakh at 11% for 20 years | Rs 39.7 lakh at 9% for 20 years |
| EMI | Rs 49,545 | Rs 35,719 |
| Savings | Rs 37,045 per month (if living on rent) | It is assumed that the buyer will invest the Rs 12-lakh down payment and Rs 37,045 saved every month in an option that earns 7% a year. |
By postponing the purchase of the property by a year, the buyer can reduce his EMI by almost 28% or Rs 13,826. If he can afford an EMI of Rs 49,545, he can reduce his loan tenure by almost half—from 20 years to just 10 years and 3 months.
