|View Poll Results: Home Loans in today's times: Are they worth it?|
|Do Not take a Home Loan, invest in retirement savings plans, etc.||10||18.87%|
|Take a Home Loan for a well developed area, it makes financial sense in the long run.||17||32.08%|
|Take a Home Loan, but not for a well developed, inflated area.||21||39.62%|
|None of the above, there are other ways of safe guarding your future.||5||9.43%|
|Voters: 53. You may not vote on this poll|
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|21st September 2010, 13:47||#1|
Senior - BHPian
Join Date: Feb 2010
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BUY a flat or stay on RENT?
I tried searching for this on the forum but did not find anything of much value on this topic. Hence creating a thread for it. If I missed out on an related thread I will request mods to merge this thread.
I am right now in a sort of dilemma. I see all my colleauges buying flats in apartments. And I am also tempted to do the same. But when I sit down to do calculations numbers do not add up.
I will request all those who have actually bought house to contribute to this.
All this is w.r.t Bangalore Real estate.
Recently my friend bought a 2BHK house worth 30 lacs. I asked him like what is the total money he will pay out including the intrest. He said as a rule of thumb the person ends up paying around twice the actual value of the property. So I assume that he will be paying around say 55 lacs at the end of say 15 years. Now the question which is bugging me is that how much the 15 year old flat will be worth at that time?
And to get real picture lets talk of inflation adjusted figures.
What I have seen is that flats go up in value for sometime and then its a downward spiral as it gets older. I have stayed in an apartment which was old and I cannot forsee flats in it getting higher in value.
Is there anything in particular to be looked at while making a purchase so that the value of flat keeps on increasing?
There is a camp of people who say that your current rent is 15k. It is never going to come back. Its bye bye money thing. But then those who are paying the EMI, intial few years the intrest component is as high as 80%. So for an EMI of 30k they are also saying Bye Bye to 24K. Though the amount will reduce as one proceeds in years.
So is it better that one stays on rent and puts money saved in wealth creation schemes like SIP etc? Or is it better to go for a flat in apratment? Land in bangalore is not an option for me. I do not have that kind of money.
Is there any rule of thumb which says if the difference between the rent one pays and the EMI one will pay on buying a flat is less than a particular amount then one should go for a flat purchase? If there is such a rule then I will like to know that particuar amount.
I am just a novice in this field and just have started looking into this field seriously. I will be greatful for all the comments.
|21st September 2010, 13:59||#2|
Senior - BHPian
Join Date: Oct 2009
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Some points here.
If you go for a fixed interest rate, then your EMI amount remains the same for the period of 15 years.
Your rent goes up north. So today you are paying 15K rent doesn't mean that you'd pay 15K rent 10 years down the line, especially with current inflation levels.
Flat is a long term investment. You don't think of selling that off after 15 years or 20 years unless you want to move out of that place in to a new one within city, or back to your village in a farm house. And real estate always appreciates. The rate of returns might not be good enough like other high risk investment plans. But then it's your own home.
If one wants a land, why not go for outside Bangalore? Ofcourse safeguarding that land from poachers is a big issue. Further, if one constructs a property on that and is unable to rent it out or move in, it becomes a dead liability for some time. But in the long run, it's a place where one can settle down. And those outskirts areas will become city centres 10 - 15 years later.
There is no thumb rule stating about difference in amounts as you asked. It all depends on some parameters which include the tax savings that can be done with investment declaration for both rent as well as emi. Currently they are covered in various sections. But if the proposed IT bill comes in to force, we will not get any of those benefits down the line (which is as early as next year). I'm still waiting for more clarity on what is allowed and what is not allowed for tax exemptions and the limits that will go with the new IT rules, when that happens.
As of now ideally, it is better to go for a loan amount where in EMI gets max tax savings. One can go for 30 -40 lacs as well, but then what is the use if only certain amount of interest and certain amount of principal are given exemption?
And if you get a house in your native and still stay in rent in a different city, you can get tax benefit on both, provided the house is shown as self occupancy (dependant parents staying there).
I'd say go for a flat within your means.
|21st September 2010, 14:00||#3|
Join Date: Jan 2009
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There are a couple of other factors that I think you should look at. The appreciation on the flats may saturate after sometime and the value may not increase or decrease, but the cost of the land on which the apartment is built will keep increasing. So, if the apartment is in a good locality and is subtantially well developed township, there are always a chance that a prospective builder might come in with plans of redevelopment and offer substantial money or a newer flat in the society.
Secondly, when you do calculation of comparision of rent vs EMI, please do also consider the savings on the tax. If you are married, you can both get the tax benefit. You may find that the interest that you are paying in the EMIs, can be equivalent to the tax savings depending on your earnings, tax liabilities, joint loans etc.
Also, most of the experts would suggest that you should close your HL within 40% of your tenure to get the maximum benefit.
Do a bit of number crunching on these fronts and then take a decision.
@MX6: AFAIK, the rebate on HL interest is staying and so the 80CC. The proposed tax structure has revised slabs as against what was proposed earlier when removal of all the rebates were proposed.
All the best.
Last edited by Ardy : 21st September 2010 at 14:02.
|21st September 2010, 14:01||#4|
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Location: Navi Mumbai
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In the current scenario its best to wait and live on rent especially in a city like Pune (I guess Bangalore is a bit better) where I live, as its far more easy and a financially intelligent decision to stay on rent than to buy. In Pune 3 bhk apartments in good areas like Wanowrie, Aundh etc are available for 13-15k while the emi to own such an apartment with full loan is almost 50k or maybe more. So dont fall for peer pressure and buy coz everyone is blindly buying.
Rental rates give a true pricture of the overall affordibility of the general public. The builders are increasing rates almost everyday citing various stupid reason but rental rates have more or less remained stagnant and in some cases even reduced from the last 2-3 years. What does this tell you? One 1 thing that there Indian RE is overhyped and there is a huge bubble which will burst sooner or later.
|21st September 2010, 14:05||#5|
Join Date: Feb 2006
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One rule i read somewhere ( in 2004 when i booked an apartment ) was the benchmark figure of 240/250. lets say you like a house. If the rent is 10K, then it makes sense to buy that house if it costs less than 25 lacs (10K * 250 ). If more, then its better of staying there paying the rent.
I dont know the basis for this 250. I vaguely remember it was based on some interest, inflation, tax calculations, etc. I am not sure of its validity now. Also, this is applicable only for own use and not as an investment.
|21st September 2010, 14:09||#6|
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You need to decide whether your would be staying in rented flat for life or would like to spend your rest of life in your own flat. During the initial years staying in a rented place seems to be an ideal choice. As you grow and have family you start feeling the need for your own house. In fact you are creating a fixed asset for yourselves which can be made liquid at any given point of time.
Another thing is in both cases of paying rent and EMI's you are bound to loose some money, why not then own your house and pay the money. You can also save taxes on the interest paid (to a limit of 1.5L, principal amt come DTC will also be not elegibel for tax saving).
As MX6 rightly said the rent rates as well as the flat rates are not going to remain the same over the years. If you are thinking of saving some amount of EMI by paying rent and start SIP hoping that amount collected over the next few years would be sufficient to buy a flat then you are mistaken my friend coz the flat rate would also be at an unaffordable rate by the time you manage some funds.
So my suggestion, find an affordable flat, take a loan and get out of rented place. Atleast there will be solace that your own the flat.
|21st September 2010, 14:12||#7|
Join Date: Sep 2009
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@download2live, your calculation is right on the money. Financially, it doesn't make much sense to pay high EMI's and from investment point of view, if you buy flat through loan and let it out, it never earns back the same return. Thus, financially it makes sense to buy only if you have sufficient money without finance or plan finance in such a way that interest earned is more than interest paid.
However, house buying decisions are more emotional than financial. It is more satisfying to be an owner than a tenant. Also, there certainly will be an appreciation in value of the property 15 years from now because flat owners will be entitled to the divided portion of land on which it is built on and land always only appreciates. Thus it is not such a wrong thing to buy even, provided you make a calculated risk and take the plunge.
Under ideal theoretical situation, its best to invest money now, stay at a rented place and when the investment has grown sufficiently, take the plunge to buy the property. But the proportion of land appreciation vis-a-vis growth of invested funds is not at the same scale. To cover the risk of apartment complex not holding onto its value in the future, you may consider buying from a reputed builder now.
|21st September 2010, 14:28||#8|
Join Date: Feb 2005
Location: San Jose, CA
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I think it may vary city to city.
For example, noida.
A good flat 3 bedroom not far away from city will cost 60 lakhs(1500sqft)
The rent for the same flat is 16000 today.
Now lets compute
You take a 60 lakh loan at 7%. your outgo will be 46000 for 20 years every month.
Lets say you stay on rent with 10% increase every year
First year you pay 16000*12
Second year it goes to 16000*12*1.1 and so on
So after 12 years your outgo will be same as loan.
After that your outgo will be more than loan.
Moreover, if you sell your flat after 20 years, there is a good chance you will get the money back as you will be able to sell the flat for 1.2 crores atleast(inflation).
So what does this tell you.
Are you a wiz at stock markets, and can make money grow like anything? Then stay on rent, and the extra 25K you save can be invested and made into 2 lakhs.
If you are just like the rest of us, its a no win and no lose situation!
|21st September 2010, 14:40||#9|
Join Date: Nov 2006
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I looked at it in a more simpler prespective. Since i am married, and have my own little family, and by tradition the house my parents built will be handed to my brother, i had to have a house of my own.
So, why not get started with it right away, at an age when i can afford to keep aside money for the same through EMIs? As for staying on rent, you never can predict when the house owner asks you to move out, or the rent may be hiked drastically. Shifting homes and resettling once you have kids is a pain.
|21st September 2010, 14:55||#10|
Distinguished - BHPian
Join Date: Sep 2006
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I have been very lucky on this situation. Thank you god !
We own an independent house in center of city which is owned by mom but which will eventually come to me.
I bought a flat in end-2005 when rate was Rs.1500/sq.ft in one of the most prominent and classy areas of our city and currently that area demands Rs.4500-Rs.5000 per sft at the minimum.
Essentially a 25 Lakh apartment that i invested in has grown to over 75 Lakhs in 5 years. With an EMI of Rs.12K a month for 20 years ( 15 lakhs). I feel i am sitting pretty!
In current market scenario, there would be no choice but would have done either of the below
I would not have been able to buy an apartment at 75 lakhs and would have prefered to stay in rented place and save up money and wait for another recession
Taking an example of a cousin, buy a plot about 18kms-20kms out of the city and construct a lovely house including a penthouse for about 40 Lakhs. But, travelling 20kms to outskirts is simply unbearable considering the traffic conditions bludegeoning like crazy each month.
|21st September 2010, 15:03||#11|
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I too, like mobike008, got a flat in the centre of the city for Rs 1600 per sft in Nov, 2005. But my loan was much higher--29 lacs for a period of 14 years.
The only negative aspect is that my EMI rose from 28% of my take home salary to 37% becuase of the hike in interest rates from 7% to the current 11.5%.
I could rent a flat in my complex for only 25% of my take home salary, and therefore I am losing around 12% of my salary on my flat's EMIs. But the only redeeming factor is that it is now worth 3 times the rate I bought it for.
So as someone said, it differs from city to city, and also on your age.
|21st September 2010, 16:00||#12|
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Join Date: Feb 2010
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Thanks for the replies guys.
Also my wife name popped up in CIBIL while we were looking for car loan. Does that mean that we two together cannot take the loan together and share the Tax benifits? An what about the HRA which we will lose out on?
If I am going to be in market it will be via SIP only. No trading for me.
But SIP has consistently given returns of around 20%.
If I take house example quoted by you I find this (Please correct me if I am wrong. I am not good in maths):
Assuming an inflation of 10%,
So an amount of Rs 100 is equivalent to Rs 672 twenty years from now.
But 100 rupees I will put in a flat will worth 106 rupees only.
Trusty MF's typically return more than 10% over a period of 20 years.
Now we need to take into account the rent which went as it is. So 25K*12*20*1.1= 6600 or 66 lacs in hand . That is if I stay on rent.
120 lacs If I buy apartment.
Ok I have lost it now. I said I was poor in maths.
But one thing. Will I be able to find a buyer of 1.2 crore flat?
A person like that wont he go for a new one?
I do not mean to prove a point here. I just want to clarify things. And I want to know how much I lose either ways, e.g. rent or buy option.
|21st September 2010, 16:40||#13|
Join Date: May 2010
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I'm in the same situation as you. Seeing our neighbours getting flats of their own has meant that i am under a lot of pressure from my wife to get a place of our own. The reasons i'm not getting an apartment of my own are as follows:
1. I will have to pay atleast 4 times my current rent as EMI to get a 2 BHK apartment at far off places from my office and then put up with the traffic daily.
2. So i buy a cheap apartment ( by bangalore standards ) for around 33 lakhs at a far off place and then in 5-10 years, the place starts to look really old and we get tired of living there. But by that time, the price would have started depreciating already. With a rented house, i can just shift to a place i would like better.
3. The apartments that i like, I cannot afford and the apartments that i can afford, i do not like .
4. I am not even sure i will stay in Bangalore for the rest of my life ( or the country for that matter). So i do not want to have additional liabilities that would make it difficult for me to move.
5. It doesn't help much that i am the only earning member in our family of two ( so far).
I will probably get myself a flat in the future but only when I am absolutely sure that i like the house and that i don't have to shell more than 50% of my take home salary on the EMIs.
|21st September 2010, 16:47||#14|
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I will never waste 30 or 40 lakhs buying an apartment and end up paying EMIs for the rest of my life.
It's all about PEER PRESSURE which our better halves seem to get vastly influenced with; and they start making your life miserable until you take the plunge and make a huge investment on an apartment.
EDIT: I have some good amount of land in my native place, and I also decided to buy some land as investment in city outskirts. I stay on rent until I can go back and then I can build a house in the land which we already have, so this is my opinion and it can vary from person to person depending on his / her current situation and in which city he/she is living.
I am paying a rent of Rs 3500 per month for a new 2 BHK house in a nice locality, with compound wall, car park, front yard (about 5 cents) and a back yard (about 4 cents). In a city like Blr, you can't dream about having such a house for rent - so the math changes.
Last edited by clevermax : 21st September 2010 at 17:00.
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