You work, the pay is good. You want to buy a house by taking out a home loan, but wait. You come across a post from an influencer on social media claiming that renting may be more profitable in the current circumstances. But you also want to enjoy the benefits of living in your own home. Now you are in a dilemma. How to do without it?
Although there is no objective answer to which is better between buying a house or renting it, there are several points that you can consider to make the right decision. Whether it’s to rent or buy, either decision can have a big impact on your short and long term finances.
“While this is a personal decision that depends on a number of factors, including the state of your finances, you also need to take into consideration the macroeconomic conditions that affect the market and the economy,” says Praneet Battina, Investment Research, Fi Money.
One of the most important macroeconomic factors is the dynamics of the housing market. The housing market is highly localized as demand and supply vary by location, which impacts the cost of buying or renting.
“For example, the housing market in the NCR of Delhi had an excess inventory of 65 months compared to less than 30 months for Pune and Chennai, according to the Real Insight Residential report – April-June 2022. Pune and Chennai also experienced the strongest price growth during the year at 9%,” says Praneet.
Also Read: Renting vs Buying: Rs 60 lakh profit on buying a house Rs 50 lakh than renting for Rs 20,000/month
Another macro factor to consider is the interest rate cycle. Experts say this is important because it sets the bar for home loan rates, which in turn affects affordability. In a rising interest rate scenario, home loan rates rise, making it more expensive to buy a home, while the reverse is true when interest rates fall. From another perspective, rising interest rates make renting relatively cheaper.
Other Factors to Consider
According to Praneet, there are several other factors on a personal level that should be considered:
- Home loan rates are of paramount importance to potential homeowners. Besides the interest rate cycle, your credit score will also play a role in determining the cost of your loan.
- You also need to make sure that the monthly loan repayments don’t take too much of your or your family’s disposable income.
- How long you’re willing to stay in one place is also important when comparing the cost of renting to buying a home.
- Renting is preferable for short periods but it can be more expensive than buying a house, especially in an inflationary environment, in the long term because the rental amount increases from year to year.
- Another factor in the cost comparison between the two options is how disciplined you are with your money.
- Many see buying a home as a forced savings. If you’re already used to saving and investing, paying expensive EMIs can come at the expense of investing in assets that offer better returns. It also depends on your investment risk appetite and how much you expect your home’s value to appreciate in the future.
Read also: Should you buy a house or rent it?
Besides the above, there are many other factors that may not be quantifiable, such as the security of owning a home or achieving a life goal. If the dilemma of calculating rent versus buying is not yet resolved, you may consider seeking advice from a professional financial advisor.