I want to move out of my parent’s house! I’m getting married and need a place to live! I’m changing cities because of my job and need my own pad!
The age-old question of whether to buy a house or live in a rented place has always been an important part of personal finance decisions. The shift from being a renter to a house owner is a complex one, both emotionally and financially. But, what are the factors that need to be considered before you make a decision?
The renting-vs.-buying question is not something that people usually ask and answer just once. This is a decision with many moving parts, and things change: Your down payment savings grow, you consider moving to a cheaper or more expensive area, you’re curious what happens if you spend less on a home, or more. These are a few things you need to keep in mind before making your decision.
- Where you want to live
- The home’s purchase price
- Your down payment
- The term of your mortgage
- How long you think you’ll live there
- The cost of renting a similar home
Buying a house
Buying a house is a smart choice. But, before you buy one, here are a few factors that you must consider.
- Got cash to spare? – Houses and apartments tend to be expensive and if you don’t have the means to pay for it outright, you’re probably going to have to opt for a Home Loan. But here’s the thing with Home Loans; lending institutions usually loan you around 80-90% of the cost of the property, depending on the lender. The remaining 10-20% must be put up by you, the buyer. So, make sure that you have enough cash to make the down payment.
Tip: Creating savings goals for yourself and investing accordingly early in your career could take care of this.
- Debt-To-Income Ratio – Another important factor is your debt-to-income ratio. This is the number of loans you have taken in proportion to your income. If you’re taking a loan, most lenders look at this ratio to make sure that you won’t default on your loan payments and other debts. Ideally, your debt-to-income ratio should be below 50%.
- Other Expenses – When buying a house there are other expenses to think about such as property tax, insurance, annual repairs, maintenance and other costs. Do you have sufficient means to take care of these?
- Mobility – When you buy a house, remember that you give up on mobility. This could be an issue if you shift jobs and your new office is at a distant location from where you live or is in another city. Of course, there are always ways to deal with this but it is something to consider when deciding whether to rent or buy.
- Area Analysis – Check the real estate prices in the location where you wish to purchase the property and the future potential of the property.
Renting a House
If you wish to live in a rented property, here are a few things you should take into account:
- The security deposit to be paid to the house owner.
- The monthly rent you pay.
- The shifting and brokerage charges you will have to incur every time you shift your house.
- The annual increase in rent and the hassles of shifting frequently.
If you are a salaried employee, you will receive a House Rent Allowance benefit when you pay rent under the Income Tax Act. However, you will not own any asset and therefore will not reap the benefits of appreciation in real estate prices.
The decision of whether to buy a house or continue renting can also be based on your annual salary.
Renting a house also works for young millenials who are constantly changing jobs, shifting cities, and who live in a constant flux of change.
This decision will have to be made after considering the various factors mentioned above. Buying a house should be a careful and calculated decision made only after a lot of thinking. If you’re ready to spend that much money, staying on rent should suffice.