Rent, Invest, Then Buy: A Smarter Path to Own Your Dream Home

Ever feel the pressure to ditch the rent and buy a house? The story plays out everywhere:

"Beta, kab tak rent par rahoge? All your friends are buying houses. How long will you throw away money on rent?"

This is a conversation most young professionals are familiar with. Parents, relatives, and even well-meaning friends, often urge you to purchase a home as soon as you settle in your career. While there’s certainly emotional value in owning your own home, it’s important to ask: Is it financially wise to jump into a home loan immediately?

Rent vs. Buy: A Look at the Numbers

Take, for instance, Avyaan, a young professional who buys a house and takes a home loan worth ?1 crore, at an 8.5% interest rate for 20 years. His monthly EMI will be approximately ?87,000. However, the part that most people overlook is how the EMI is structured—in the initial years, a huge portion of it goes towards paying the interest, not reducing the loan principal.

For example:

• After 5 years, Avyaan will have paid nearly ?52 lakhs in EMIs. But shockingly, his outstanding loan will still be ?88 lakhs. The bulk of his payments went towards interest.
• Even after 10 years of diligent EMI payments, totaling ?1.04 crores, his loan will still stand at ?70 lakhs.

So, while he may have "saved on rent," he hasn’t significantly reduced his debt. Instead, he has paid a fortune in interest to the bank.

What If You Delayed Buying and Invested Instead?

Now, let’s explore another scenario. What if, instead of rushing to buy a house, Avyaan decided to stay in a rented apartment and invest the difference between his rent and the EMI?

Suppose Avyaan pays a monthly rent of ?25,000 for a similar house. If he were to buy the house, his EMI would be ?87,000. This creates a difference of ?62,000 every month. Avyaan invests the difference every month into a mutual fund or an investment product giving an annual return of 12%.

Accounting for Rising Costs

- Rent Increases: We’ll assume Avyaan’s monthly rent increases by 5% every year.

- Property Appreciation: Similarly, the price of the property is expected to appreciate by 5% each year, reflecting typical market trends.

Let’s look at how the numbers play out:

Scenario 1: Immediate Home Purchase

Here’s the impact of buying the house right away:

- Monthly EMI: ?87,000

- EMI Paid Over 5 Years: ?52,00,000

- Outstanding Loan Amount After 5 Years: ?88,00,000

- Total Amount Paid Through EMI Over 20 Years: ?2.08 crores

Scenario 2: Delaying the Purchase by 5 Years

Instead of buying immediately, Avyaan rents and invests the difference between his rent and EMI every month into a financial product that gives him an annual return of 12%. After 5 years of investing, here's what happens:

• Over the 5 years, the difference between the rent and EMI starts at ?62,000 in year 1 and gradually reduces to ?56,612 by year 5, as the rent increases annually.
• By investing these amounts monthly at a 12% annual return, by the end of 5 years, Avyaan would accumulate approximately ?48.22 lakhs.

Property Price After 5 Years:

• Given a 5% annual appreciation rate on the ?1 crore property, the new price after 5 years would be approximately ?1,27,63,000.

Now, when Avyaan decides to buy the house after 5 years, the loan required would only be:

• Loan Needed: ?1,27,63,000 - ?48,22,000 = ?79,41,000.

Loan Comparison

Here’s a comparison of the loan outstanding in both scenarios:

By Delaying the Purchase and Investing the Difference for Just 5 Years, Avyaan Can:

• Reduce his loan amount by approximately ?8.6 lakhs (from ?88 lakhs to ?79.4 lakhs).
• Shorten his loan tenure by 3 years (17 years vs. 20 years).
• Save around ?33 lakhs in total payments over the entire loan tenure (?2.08 crores vs. ?1.75 crores).

Conclusion: Don’t Rush, Plan Smart

While buying a home may feel like the natural next step once you start earning well, it’s essential to weigh the financial implications of taking a large home loan early in your career.

Renting for a few years and investing the difference between rent and EMI can significantly reduce your debt burden, shorten your loan tenure, and save you a considerable amount in interest payments.

Take your time, invest wisely, and set yourself up for long-term financial success. ??

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