Rent or buy your own home? The whole math of 'owning a home' has changed in 25 years!

Experts are now advocating for decisions to be made based on 7-10 years of needs and one's own pocket, as the loan burden has increased significantly compared to rental yields.

We are on the threshold of entering the 26th year of the 21st century. With the pace of time, the biggest ambition of the Indian middle class—owning a home—is no longer as simple as it once was. 

If you're planning a housewarming ceremony this New Year or considering moving out of a rented apartment, pause and do some math. The rules for buying a home in 2000 have completely changed by 2025. 

While decisions were once based solely on bank passbooks and savings, now, heavyweight terms like lifestyle, skyrocketing interest rates, and "opportunity cost" have become a part of this entire process.

The 2000s: When buying a home was better than paying rent

Consider the early 2000s. Those days were a far cry from the glitz and glamour of today. In Delhi and other metropolitan cities, a decent home could easily be found for between ₹10 lakh and ₹40 lakh. The most remarkable feature of that era was that there wasn't much difference between home loan EMIs and house rent.

This was why middle-class families found it more prudent to pay bank installments rather than rent receipts. Back then, obtaining a loan from a bank wasn't as complicated as it is today, and the down payment was also less burdensome. Buying a property wasn't simply about finding a place to live, but it was considered the safest and most reliable way to build wealth.

2008-2009: How did the balance between rent and EMI change?

The real twist in the property market's story came after the global recession of 2008. Between 2010 and 2020, India's real estate sector took such a turn that it shattered the common man's budget. 

Demand for homes in metro cities increased so rapidly that prices skyrocketed. The situation has reached such a level that even a small home in areas like Delhi-NCR is now nearly impossible to find for less than ₹50 lakh. In the luxury market, prices of flats at DLF Camellias in Gurgaon have ranged from ₹73 crore to ₹190 crore.

The biggest concern is that the balance between rent and EMI has completely deteriorated. The math in big cities now suggests that renting is better than paying a hefty EMI. A home that costs Rs 50,000 today can easily be rented for Rs 20,000 to Rs 25,000.

More interest than the house price

Let's understand this math in more detail with an example. Suppose you buy a flat worth Rs 1 crore today and take out a home loan of Rs 80 lakh from a bank. If the interest rate is 9% and you take out a loan for 20 years, you will have to pay an EMI of approximately Rs 72,000 per month.

The surprising figure is that at the end of 20 years, you pay a total of approximately ₹1.73 crore to the bank. Of this, approximately ₹93 lakh is taken out of your pocket just as interest. 

Simply put, you pay the bank almost the same amount as the amount you paid to purchase the house. If the loan term were extended from 20 to 30 years, the interest amount would exceed the actual cost of the house. On the other hand, the rental yield is only between 3.5% and 5%, which is not very attractive from an investment perspective.

When is the right time to buy a house?

In today's world, "one size fits all" doesn't apply to everyone. Renting a home gives you the freedom to change cities and jobs, while owning a home provides a sense of emotional security. 

Financial expert CA Kaushik advises not to make a home-buying decision based on emotions. Buy a home only if you have a firm intention of staying in that city or home for at least 7 to 10 years.

Your financial planning should ensure that the EMI does not exceed 25-30% of your monthly salary. Most importantly, establish a strong emergency fund before booking a home, so that if future difficulties arise, the burden of a loan won't overwhelm you. 

There's nothing wrong with owning a home, but a decision made at the wrong time without proper calculations can severely impact your overall financial well-being.