Economy Mar 29, 2012
Everybody wants to own their dream home. In fact, according to a survey by makaan.com, 27 percent of home buyers believe that owning a house should be declared a fundamental right. But, financially speaking, in Mumbai, does it make more sense to buy one or just rent a house?
With escalating prices, rising interest rates and delayed possession of houses, it just might be more sensible to live on rented property, despite the proposal to increase stamp duty by 160 times in Maharashtra. Why? Well, as anEconomic Times article points out, sometimes, the desire to own a house can cause irreparable damage to an individual if his/her finances are stretched too far. Moreover, if you are cash-strappedor are unsure whether you will be able to sustain yourself after making that big down-payment, renting a house may be a wiser option for you.
Here are six things to watch for before buying a house in Mumbai:
1. Do not exhaust your home loan eligibility. Don't take hugepersonal loans and use up all your savings to buy a house you cannot afford. If you don't have the kind of money required to purchase a home, wait a while. It's better to live on rent than overshoot your budget by a huge margin.
2. With interest rates showing no signs of easing any time soon,EMIs (equated monthly installments) are bound to rise because most home loans have floating rates instead of fixed rates. That means the interest and the principal amount will vary depending on the prevailing market rate. Hence, not only will you pay higher EMIs, you will also have to bear the brunt of higher interest rates. More importantly, one must always limit "EMIs to 50 percent of one's salary to insulate finances from interest rate movements or uncertainty on the job front," the ET article said.
3. All homes require upkeep and maintenance. Not everybody has the wherewithal, much less the desire, to tackle home repair projects. In addition, many first-time home buyers cannot afford to spend money on fixing things that go wrong in the house. Whether it is repainting, plumbing or even changing an electrical wire, they cost money! If you cannot set aside 5 percent of the purchase price to cover maintenance and repairs, postpone your decision to buy a house.
4. If your EMI is double the amount (or more) you would pay for rent, it might not make financial sense for you to buy. For example, if it costs you Rs 26,000 a month to live in a house on rent, and around Rs 50,000 or more to a month to own one, does it make sense to spend Rs 6,00,000 a year to own a posh home in Mumbai? Try to calculate and compare the costs involved in renting as well as buying a house. If the cost variation is small, then you can opt for buying, but if the gap is significantly large and in favor of renting, isn't it better to live in rented property?
5. If you are one of those who insists on living in a posh suburb in Mumbai, renting is definitely a wiser option. Because an expensive apartment means you will have to shell out more for services. Be it domestic help, maintenance, better lifestyle, cars or better brands. Renting out will at least help you save on maintenance and you will only be paying 2 to 3 percent of the capital value as rent!
6. And finally, buying a house involves risk. The big risk is that of property market uncertainty, which will affect the final appreciation in the price of your property. Then, there are also the risks of interest rate fluctuations and market returns on capital. If the cost of capital invested in a property far exceeds the expected return after a stipulated period of time, buying becomes uneconomical.
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