Should you buy or rent your home?

Owning a home is perhaps the biggest and most important dream of an average Indian family. Due to its inherent socio-economic nature, ownership of a home goes beyond pure financial considerations. Renting a house on the other hand is acceptable for the sake of convenience and financial constraints. So, how do you decide whether to buy or rent your home?

Following table provides an overview of advantages and disadvantages of owning or renting a house.

Investment in a residential house is an important economic decision that should be taken based on hard facts such as cost of capital, effective rate of mortgage interest, forecasted capital appreciation of property values and the prevailing market rental rates.

Though the cost of owned funds vary from person to person, as it is the rate of return earned from an alternative investment avenue. However, the cost of owned as well as loaned funds is low in declining interest rates scenario. On one hand you earn lesser interest than you used to on your deposits and on the other you get a loan at lower interest too. So the overall cost of capital is low. The rate of mortgage interest, i.e. the interest charged by the housing finance company on your home loan, is also on decline. The property prices which were all heated up for last few years have started cooling down. This provides a strong potential for your property to appreciate over a period of 10 to 15 years.

There are few tax shelters available for Rental Payouts both for salaried employees by way of HRA Deductions and for self-employed professionals under section 80GG. However, the applicability is limited and there are some preconditions attached to it.

In many cases, the amount of money that a person spends on rent is about the same as or less than the amount that he pays as installment of a home loan. However, with the tax benefit for homeowners, the savings can be significant. Tax authorities look with favor upon those servicing a housing loan from specified financial institutions. So, the post tax cost difference between owning a home through the loan route and renting a home is reducing.

Tax sops are provided to persons repaying housing loan under Sec 24 and Sec 80C of the Income Tax Act. Under Sec 24 you are allowed to deduct an amount equivalent to the total interest payable on the housing loan from your taxable income within the same financial year. Whereas, Sec 80C provides deduction for principal repayment upto a maximum of Rs.100,000.

With the tax savings on housing loan the installment payment is less than the rental payment after first few years. Considering these facts, even financially it makes sense to own a home by availing housing loan.

Lastly, renting is an expense and owning is an investment. If you pick the right location, live in the home for a decent amount of time and take care of your abode, it can pay off well. Not to mention paying off a home loan is the key to build a strong credit history.