Should you live on rent when you can afford an EMI?

"So how was the Delhi trip?" she asked, as soon as she entered my room with a view.

"Very smoky, to be honest," I replied. "I am glad, I can finally breathe properly."

"Yeah I read the newspapers about how polluted Delhi is."

"You know, Delhi is a funny place, one day they burst crackers and the next day they are out with their masks."

"Ha ha ha."

"Anyway, so how have you been?" I asked.

"Actually, I have a problem, which you could help me with," she said.

"So what is the problem?" I asked.

"My father has got friendly with one of our neighbours."

"So?"

"And this neighbour has put a thought in my father's head."

"I can see where that is going. At the end of the day, it's all about loving your parents."

"No jokes V," she said. "I am really stressed with this situation."

"Okay. Tell me what has happened?"

"This neighbour has told my father that why are you paying rent, when you can pay an EMI."

"Hmmm."

"You know, the age old idea about buying something and owning an asset, rather than to keep renting it."

"But there is a reason you are renting it," I tried to explain.

"Yes. But he doesn't get that."

"So this place you live in, you pay a rent of Rs 35,000 per month."

"That's right."

"That works out to Rs 4.2 lakh annually."

"Well, now that you put it that way, that does sound like a lot of money."

"Which is why your father bought the logic of paying an EMI rather than a rent."

"If you say so," she said.

"Now, if you wanted to buy this house you are living in, how much would that cost?"

"Around Rs 2 crore."

"Let's say you were to buy this house. The downpayment would be 20% of the cost of the house. That works out to Rs 40 lakh (20% of Rs 2 crore). Do you think you will be able to manage the downpayment?"

"Yes. I should manage to scrape through."

"You will have to take a loan of Rs 1.6 crore to be able to buy the house."

"What is the EMI likely to be?"

"If you took a home loan with a repayment term of 20 years at an interest of 9%, the EMI will be Rs 1.44 lakh."

"That's a lot of money to be paying every month."

"Yes it is."

"Right now I am paying a rent of Rs 35,000 per month. If I want to own this house, I have to pay Rs 1.44 lakh as an EMI. The difference is huge. Plus there will be other costs like building maintenance and property taxes, which are currently paid by the landlord."

"That is true."

"Also, currently you live in a decent part of the city and can reach your place of work within 30 minutes."

"And that as well," she replied.

"If you want to buy a house, my calculations suggest that you cannot afford to pay an EMI of more than Rs 50,000. At that EMI you will get a loan of around Rs 55 lakh. Even with a downpayment of Rs 20 lakh, you can't buy something which costs more than Rs 75 lakh."

"That is correct."

"At that price, you will not be able to buy a home, around where you live. You will have to move to the outer areas of the city, and spend more time in getting to your workplace and coming back from it. Of course, on the flip side no landlord will let you stay forever and you may have to keep changing homes every few years. But the thing is, in recent years, there has been an oversupply of homes and landlords are more considerate."

"All this makes sense. But how do you explain this to my father?"

"Oh you can't. When it comes to family pressure, logic and numbers don't make sense. Your father just likes the idea of you owing a house," I said.

"And that's that."

(The example is hypothetical) 
Vivek Kaul is the author of the Easy Money trilogy.