Rent Vs EMI - The Big Debate !

For the average Indian, a major sign of truly having arrived to success is buying a home of his own.

A common refrain heard is that “it is better to pay an EMI and own a home, rather than pay a rent and make someone else rich”.

While this argument does have merits of its own, there are certain times when paying a rent makes more sense.

If you are currently caught in the dilemma of whether to pay a rent or EMI, here is some advice that will help with the decision.

A home is definitely about being close to everything that you need to lead a comfortable life. The question of whether to buy it or rent it often depends purely on the financial considerations involved and how you handle it.It would be prudent to get a financial advisor to help you make the right decision. If not, here is what you need to keep in mind.1. When EMI Makes Sense Financially:  The first factor to evaluate in the rent vs EMI debate is your financial position. You may have found the perfect house – one that is close to work and school and which has all the amenities you need for a good life close to you.Find out the approximate price with all additional costs. If this sum is more than 75% of what your proposed EMI is going to be, it would be a good idea to consider buying.2. How Much Upfront Payment Can You Afford:In general, you may be eligible for a home loan that covers up to 80% of the cost. Which means, you have to pay around 20% to 25% of this amount upfront as your contribution.For example, with your down payment, you will take on a loan amount of Rs 48 lakh for a Rs 60 lakh home. This would put your EMI at approximately Rs 50,000 a month, based on current rates of interest.If this EMI is more than 40% of your monthly income, then you are better off with a rental home. Ideally, if you can pay over 50% of the value of the home as your contribution, then that it would be a good idea for you to invest, else continuing to rent is better. 3. Will You Be Ready for Pre-Payment:In an ideal scenario, you should be prepared for a total pre-payment of your loan amount within a few years of beginning it.Keep in mind that making regular EMI payments will get you a good discount when you work on pre-payment. Work out your finances and make a projection of where you will stand a decade or so after taking the loan.Pre-paying even a small amount of around Rs 10,000, in a reducing EMI scheme, will help you make some good savings while buying a home. This will help you make a decision on whether to rent or buy. You have to remember that investing in a home is all about investing a large part of its complete pricing. Putting in only a small amount of this may lead to the banks benefitting more from the interest you pay, rather than you making the most of your investment. Similarly, if you end up investing more than you can afford, you are going to be stuck in a financial rut for a long time to come.Take-aways:

• Buying a home makes sense if you are able to invest at least 50% of the total value of the project.
• Buying a home vs renting one, makes sense only if it is in line with the rent you are paying and not double that amount.
• If your financial planning allows you to be able to pre-pay major parts of the loan over a period of time, then buying a home makes more sense than renting one.