InvestorQ : What is better renting a house or buying a house on a loan?
Sneha Balasubramanian made post

What is better renting a house or buying a house on a loan?

Siya Saran answered.
10 months ago
Well, it is a common belief that buying a house on loan is better than renting a house as after paying rent for so many years, you get nothing and if you pay a little higher amount as EMI for that long, the house will be yours at the end. And who would not call this a sensible thing?

However, there is another perspective to this that we often overlook and continue with what looks beneficial prima-facie. If you take a loan for your house and repay it through EMIs, you actually pay rent on the loan as well, which is called interest. When you borrow money from the bank what you repay in monthly installments is “interest+principal”.

Let us understand this with an example, suppose you take a loan of Rs. 5 lacs at 9% p.a. for a tenure of 20 years. EMI shall be Rs. 4,499. From your 1st month EMI of Rs 4,499 you only pay Rs. 749 towards the principal and balance Rs 3,750 is paid towards the interest of your loan. And this cycle continues until the expiry of the tenure.

The total interest that you will pay is Rs 5,79,671, on a loan of Rs. 5,00,000, which is higher than the actual amount of loan taken. According to this study, you’ll end up paying interest that is equivalent to the amount of rental you would have paid. So, rather than taking a loan and eventually paying more, you can save the amount and live on rent until you save enough to buy a house. However, only cost parameters can be compared and not emotional and mental satisfaction.

As for some people having a house is a social status and for some, it is emotional well-being. Having its own house has its own benefits and having a rental house has its own benefits.  So, if you consider just cost factors it is sensible to invest your money and earn returns over it and then use the summed up amount to buy your own house.