Rajan has been working in the private sector for the past 7-8 years and is currently unmarried. He desires to buy a home before marriage, which is often an emotion-driven decision. Currently, his monthly income is around 50,000 rupees. The crucial question arises: with this salary, should Rajan consider buying a home? If so, what should the budget be? Or is renting a better option for him?
In reality, most professionals manage to buy only one or two homes during their careers. Whether purchasing one or two homes depends largely on their income. It's also important to evaluate if you truly need a home. With a 50,000 rupee salary, should one buy a home or rent? Conducting an economic analysis is imperative before making this decision.
Financial Appraisal
These days, a 50,000 rupee monthly salary is considered moderate income. Millions of people earn even less. But is this salary sufficient for home buying? With this income, Rajan must cover home loan EMIs, monthly expenses, savings, and other needs.
Initially, a minimum down payment of 10-20% is required to buy a house. For a 5 million rupee home, 5-10 lakh rupees will be necessary upfront. Does Rajan have such savings? Before buying, an emergency fund equivalent to at least six months of salary should be prioritized.
Advantages of Buying a Home
A house serves as a long-term investment. Over time, property values tend to rise, increasing overall net worth. While rent increases annually, home loan EMIs generally remain stable.
Drawbacks of Buying a Home
Paying off home loan EMIs would consume a substantial part of Rajan's salary. It's generally advised that EMIs should not exceed 30-40% of one's monthly income. With a 50,000 rupee salary, an EMI of 15,000-20,000 rupees would be ideal. Anything higher could prove economically challenging. Additionally, most people opt for home loans lasting over 20 years. In such cases, the total interest can exceed the price of the home itself.
For instance, if Rajan opts for a 5 million rupee home, at least a 20% down payment of 1 million rupees will be required. Then, he'll need a 4 million rupee loan at 8% interest. Over 20 years, Rajan will end up paying approximately 4.8 million rupees in interest alone. Hence, the total cost over 20 years will be around 9.8 million rupees.
Home Purchase Scenario- Home Price: 5 million rupees Down Payment: 1 million rupees (20%) Home Loan: 4 million rupees Interest Rate: 8% (for 20 years) Monthly EMI: roughly 33,500 rupees Other Expenses: Property Tax, Society Fees, Maintenance (3,000 rupees/month) Total Monthly Expenditure: 36,500 rupees
In such a situation, Rajan's monthly expenses would amount to 36,500 rupees, consuming about 73-77% of his income. This could be a financially risky decision, rendering the purchase of a 5 million rupee home an ill-advised move for Rajan. Under these circumstances, it would be wise for Rajan to wait for a raise or consider more affordable housing options, priced between 2.5 to 3 million rupees. This would ensure that the EMI remains within 30-40% of his salary, ideally in the range of 15,000 to 18,000 rupees monthly.
Benefits of Renting
Renting allows for hassle-free transitions when changing jobs or cities. This flexibility can be career-enhancing. Additionally, the savings from renting can be invested in shares, mutual funds, or other high-return avenues, potentially offering better long-term returns than owning a home.
What’s more Beneficial for Rajan? Buying or Renting
Let's delve into an example... Rajan earns a salary of 50,000 rupees and resides in a city where a 2 BHK flat costs 4-5 million rupees, whereas rent is 15,000 rupees a month.
Renting Equation: Monthly Rent: 15,000 rupees Additional Costs: Electricity, Water, Internet (3,000 rupees) Total Monthly Expenditure: 18,000 rupees Potential Savings: 50,000 - 18,000 = 32,000 rupees (part of which will cover other expenses, yet Rajan can still save 15,000-20,000 rupees. If he invests 15,000 rupees in a SIP monthly, it could be a profitable move. With an annual return of 12%, a 15,000 rupee monthly SIP would grow to around 14,987,219 rupees over 20 years, requiring a 3.6 million rupee investment.
Now, if Rajan buys a 5 million rupee house with its price escalating 5% annually, the property would be worth around 13.3 million rupees in 20 years. Whereas the invested SIP would reap approximately 15 million rupees, making renting more advantageous. But from a property perspective, total EMI and down payment over 20 years would tally up to 9.8 million rupees.
(Note: Given Rajan's current salary, he should aim for a home priced between 2 to 3 million rupees. If the desired home exceeds this budget, he should concentrate on increasing his income while maximizing savings through renting.)
