Mutual funds SIP vs home loan EMI: Fools build houses and wise men live in them — this British proverb is used quite often by those who live in a rented house. However, one may ask whether it is really wise to live in a rented accommodation and use the money saved from the home loan EMI for making more money out of it. According to investment experts, if someone is not sure about one’s stability and the city he or she is going to settle, it’s better to live in a rented house rather buying a home and paying hefty home loan EMI. They said that buying a home may turn out an emotional rather an economical decision if someone buys one’s dream home without thinking about the rationality of owning a house.
On when and why one should live in a rented house, Mumbai-based tax and investment expert Balwant Jain said, “Banks don’t approve more than 80 per cent of the house property cost as home loan. So, a home loan applicant will have to stash out the surplus 20 per cent property cost from one’s savings. Apart from this, there is stamp duty and some other miscellaneous charges which is also not funded in bank loan. So, one should look at one’s savings before applying for a home loan.”
Speaking on other factors that one must consider while applying for a home loan, Balwant Jain said, “If the person willing to buy home is posted in a city for short duration or it has been posted in a city where it don’t intend to settle, then living in a rented house is a better option. Real estate transactions have some costs that cannot be recovered, like stamp duty, registration charges and brokerage for sale and purchase of the house.” He said that in long term, property price rises at around 8 per cent per annum.
On how living in a rented house can help a person to accumulate wealth over the passé of time; Pankaj Mathpal, Founder & MD at Optima Money Managers said, “Suppose, someone want to buy a 2-BHK flat at ₹35 lakh. To buy this ₹35 lakh home, one will have to fish out stamp duty, registration charges, brokerage (if applicable), etc. from one’s pocket that would cost around ₹5 lakh. So, net cost of the house including all these hidden costs would come around ₹40 lakh. As banks don’t disburse more than 80 per cent of the property cost as home loan, one would get around ₹28 lakh as home loan. Keeping in mind that some NBFCs are giving up to 85 per cent of the property cost as home loan, one can get maximum ₹30 lakh home loan for a house property that costs ₹35 to a home buyer.” Mathpal said that for ₹30 lakh home loan for a period of 20 years, monthly EMI would come around ₹25,000. He advised home buyers to use the surplus home loan EMI via mutual funds SIP in monthly mode as it would give at least 12 per cent annual return on an investment of 20 years.
Asked about the rentals one can expect on ₹35 lakh house property; Amit Agarwal, CEO at NoBroker.com said, “One can expect annual 2.5 per cent to maximum 3 per cent of the property cost per annum as rental from one’s residential property whereas in commercial property the rental income comes in the range of 8-12 per cent per annum, depending upon the location and type of commercial property one owns.” He said that real estate rent grows at around 5 per cent per annum as well.
So, assuming 3 per cent of the property cost as annual rent, one will have to pay around ₹1,05,000 per annum or ₹8750 per month for a ₹35 lakh property whereas a home buyer will have to pay ₹25000 per month for living in same accommodation leaving aside ₹10 lakh onetime payment at the time of home buy.
Therefore, if a person decides to live in a rented house instead of buying ₹35 lakh home, he or she will be able to save ₹16250 per month from one’s monthly EMI. If the home buyer invests this ₹16250 in monthly mutual funds SIP for 20 years, then it will turn to around ₹1.50 crore after 20 years if the annual yield is 12 per cent.
Apart from this, one’s ₹10 lakh that one would be saving would turn around ₹92 lakh. So, net maturity amount one would get after 20 years will be around ₹2.42 crore.
Apart from this, the person living in a rented house for 20 years will end up paying ₹35.67 lakh as well.
So, net income of the person living on rent for next 20 years will be around ₹2.06 crore.
Likewise, in 20 years time, one’s ₹35 lakh house property will grow up to ₹2 crore. However, one must remember that this ₹2 crore will be cost of brand new house not a resale house property. “Old house will fetch lesser money as there would be near 1 to 1.5 per cent depreciation in resale house property,” said Pankaj Mathpal of Optima Money Managers. So, if a person decides to sale one’s house property after living there for 20 years, it would fetch him around 1.78 crore.
So, a person living in a rented house will end up accumulating ₹28 lakh more after 20 years than the one who bought ₹35 lakh house property.
Disclaimer: The views and recommendations made above are those of individual experts or personal finance companies, and not of Mint.