Owning a home is often seen as a major life milestone, especially in India. People associate owning property with stability and success. It’s common to hear stories about someone who bought a house as soon as they got their first job. But is that the best financial decision for young professionals? With easy access to home loans, it’s tempting to jump into buying a house early in your career. However, this choice might not always be the smartest move, especially when compared to renting.
Let’s explore why buying a house as soon as you start working might not be the most financially sound decision. We’ll also look at how living on rent can allow you to save and invest, helping you build a stronger financial foundation.
Home Loans and Financial Commitment
When you buy a house with a home loan, you are essentially committing to a long-term financial responsibility. In India, home loans usually run for 20 years or more, depending on the amount borrowed. For many people, this means being tied to large monthly EMIs (Equated Monthly Installments) for two decades. The excitement of buying a house can quickly fade when you realize the financial strain of these payments.
For example, let’s say you decide to buy a house that costs ₹50 lakh. Typically, you’ll need to make a down payment of around 15%, which is ₹7 lakh. The remaining amount will be covered by a home loan. If you get a loan for ₹43 lakh at an interest rate of 9% for 20 years, your monthly EMI will be around ₹38,688. That’s a huge portion of your salary, especially if you’ve just started working. On top of that, you’ll also need to cover other expenses like registration charges, stamp duty, and home furnishings, which could cost an additional ₹12 lakh.
Rent: A More Flexible Option
Now let’s consider an alternative scenario: instead of buying a house, you choose to live on rent. The same flat that would cost you ₹50 lakh to buy might be available for rent at ₹15,000-₹17,000 per month. By renting, you save the ₹38,688 that would have gone toward EMI payments, plus you avoid the hefty down payment and other associated costs.
With this extra money, you can start investing. Let’s say you invest the ₹21,000 you’re saving each month by not paying EMI into a mutual fund or other investment vehicles. Over time, these investments can generate significant returns. A well-planned investment strategy can help you grow your wealth much faster than the appreciation of real estate.
Investing Your Savings: How It Adds Up
One of the best ways to grow your money is through a Systematic Investment Plan (SIP). SIPs allow you to invest a fixed amount every month into mutual funds, which tend to give higher returns over the long term. The average return on mutual funds has been around 12% per year, but some funds offer even better returns of up to 15%.
Let’s assume you invest the ₹21,000 you save each month from not paying EMIs into a mutual fund SIP with a return of 12%. Over 20 years, this amount can grow to around ₹2.09 crore. If you’re lucky enough to get a 15% return, your investment will grow to about ₹3.18 crore.
Additionally, remember that initial ₹12 lakh you saved by not paying for the down payment and other costs? If you invest this lump sum at the same 12% rate, it can grow to ₹1.15 crore in 20 years. At a 15% return, the amount would be nearly ₹1.96 crore.
The Rising Cost of Real Estate
Many people argue that buying a house is a good investment because real estate values tend to increase over time. In India, property prices have historically appreciated at around 8% annually. This means that a flat you buy today for ₹50 lakh might be worth around ₹2.33 crore in 20 years. While this may seem like a decent return, it’s important to remember that the value of the house is tied to market conditions. Additionally, the property may lose its appeal over time due to wear and tear, leading to lower resale value compared to newer homes.
In contrast, mutual funds and other investments offer greater flexibility. You can diversify your investments, choosing different types of funds to match your risk tolerance. Unlike real estate, you’re not tied to a single asset, and you can cash out at any time without worrying about property taxes, maintenance, or finding a buyer.
The Hidden Costs of Homeownership
Owning a home comes with many hidden costs that renters don’t have to worry about. Beyond the down payment and EMI, you’ll also need to budget for maintenance, property taxes, and home insurance. Plus, if you decide to furnish or renovate your home, those costs add up quickly. Homeownership might give you a sense of security, but it can also limit your financial flexibility.
On the other hand, renting gives you more freedom. If you need to move for a job or personal reasons, it’s much easier to end a rental contract than to sell a house. Renting also allows you to live in better locations or larger homes than you might be able to afford if you were buying.
Long-Term Wealth Creation Through Investment
Instead of locking yourself into a 20-year home loan, consider the long-term benefits of renting and investing. If you invest the money you save by renting, you can potentially accumulate a much larger nest egg over time. With the right investment strategy, you can generate enough wealth to buy not just one, but two or more properties later in life—if that’s your goal.
For example, by living on rent and investing wisely, you can build a fund of ₹5 crore or more over 20 years at a 15% return rate. Even at a more conservative 12% return, you could accumulate ₹3.25 crore. This gives you the financial freedom to buy a home later, if you wish, without the stress of a large EMI weighing you down for decades.
Renting and Career Flexibility
Another major benefit of renting is that it allows you to be more flexible with your career. Buying a house often ties you to one location, making it harder to move for better job opportunities. In today’s fast-paced job market, being able to relocate quickly can be a big advantage.
Many young professionals are finding that renting offers the freedom to explore different career paths or cities without being held back by a mortgage. Additionally, the financial freedom that comes from not having to pay EMIs can open up more opportunities for investing in other ventures, like starting a business or pursuing further education.
Real Estate vs. Other Investment Options
If you’re interested in real estate as an investment, consider alternatives like buying land or property in smaller, developing cities. Tier-2 and Tier-3 cities often offer better returns on real estate investments than metro areas, and the costs are significantly lower. Another option is to invest in real estate funds, which allow you to benefit from the property market without the hassle of buying and maintaining a home.
That said, real estate should not be your only investment. Diversifying into mutual funds, stocks, and other financial instruments is key to building long-term wealth.
Renting vs Buying
In conclusion, buying a home early in your career may not be the best financial decision. Renting gives you the flexibility to move and the opportunity to invest your savings in higher-return instruments like mutual funds. By investing wisely, you can build a substantial fund that offers far more financial security than owning a house burdened with a loan.
