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Rent vs. Buy: Paying Rent to the Owner or Rent to the Bank?

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Many of us attach a lot of value to house ownership. Many of us also feel that house rent is a waste of money. It is better to take a home loan and pay a bit more. After a few years, you will also own the house. Contrast this with renting a house. You don’t own anything even after paying rent for so many years.

Is this the right thought process?

I don’t think so.

You pay the rent in both the cases, whether you rent a house, or you take a home loan. Just the nomenclature varies.


Rent that you pay the house owner is an expense. The money is gone. It is not helping you create any asset.

When you pay EMI, it helps you create an asset or reduce the amount you need to pay to own the house completely. However, the entire amount that you pay does not go towards reducing outstanding principal.

Let’s say you take a loan of Rs 50 lacs at 9% p.a. for a loan tenure of 20 years. EMI shall be Rs 44,986.

From your first month’s EMI of Rs 44,986, Rs 37,500 goes towards interest payment. Only the remaining amount of 7,486 (Rs 44,986 – Rs 37,500) will go towards the repayment of the principal. Therefore, even though you paid Rs 44,986, your loan amount reduced by only Rs 7,486 to Rs 49.93 lacs. I have discussed these calculations in detail in this post.

What does this tell us?

This interest paid on a housing loan is an expense too. It is the rent paid to the bank.

Over the course of 20 years, you will pay a total of Rs 1.08 crores to the bank in EMIs. The loan amount is only Rs 50 lacs. The remaining 58 lacs is the interest or rent paid to the bank for borrowing money to purchase the house.

Essentially, you must choose between:

Whether you should pay rent to owner OR you should pay rent to the bank?

Which approach is better? Rent vs. Buy

Let’s dig deeper with an illustration.

We will compare the rent outgo (actual rent vs interest payments) in both the cases and see where we pay a lower rent.

Let’s assume the house rent is Rs 35,000 per month. Instead of renting the house, you can buy the house and stay in it. How much would such a house cost you? The rental yields in major Indian cities fall between 2-3%.  

Rental yield is Annual Rent/Value of the house. Therefore, if a property with market value of Rs 1 crores fetches monthly rent of Rs 20,000, its rental yield will be Rs 2.4 lacs/Rs 1 crore = 2.4% p.a. Rental yield will increase if the rent increases or the value of the property decreases. Rental yield will also increase the monthly rent increases faster (or decreases slower) than the value of the property. For the rental yields to decrease, exactly the reverse must happen

Let’s assume the rental yield to be 2.5%.

Rs 35,000 per month = Rs 4.2 lacs per annum. At a rental yield of 2.5% p.a., the market value of the property should be Rs 1.68 crores. Let’s say you put down a down payment of 25% i.e. Rs 42 lacs. You take out a loan for the remaining amount of Rs 1.26 crores.

Loan Amount: Rs 1.26 crores, Loan Tenure: 20 years, Interest Rate: 8.5% p.a., EMI: Rs 1,09,346

I assume that the house rent will grow by 5% every year.

For the purpose of this analysis, I will ignore transaction costs such as brokerage, stamp duty etc. I have ignored the impact of maintenance charges that you must pay if you own the house. I will ignore the tax benefits of home loan repayment under Section 80C and Section 24. I will also ignore the tax benefits due to House Rent allowance. Further, I assume that the interest rate will remain constant during the tenure of the loan at 8.5% p.a.

Let’s see how the numbers look.

rent vs buy calculator  financial planner bangalore mumbai guargaon
buy vs rent

In the last column, you have the difference between the interest paid to the bank and the rent paid to the owner. Rent paid to the owner is slightly higher. However, given the amounts involved, the difference is almost negligible. It could have tilted in the other direction with minor changes in rental yields or interest rates.

The above analysis shows that you can be indifferent to the two scenarios. Rent paid to the landlord/owner is almost the same as the interest paid to the bank.

But I own the house if I paid EMIs

That’s right. You will own the house after 20 years if you went with the EMI option.

However, in your EMIs, you just didn’t pay the interest, you repaid the entire principal amount of Rs 1.26 crores.

Therefore, by opting to rent a house, you saved the principal repayment too. In the example considered above, about Rs 1.24 crores.

In fact, you could have stayed on rent and saved Rs 1.24 crores + down payment of Rs 42 lacs and purchased the house at the end of 20 years.

But the house will appreciate in value

So will your savings.

In addition to the down payment of Rs 42 lacs, you also save (EMI-Rent paid) every month.

I will use crude calculations to arrive at what these savings can grow to.

At 6% per annum, down payment and monthly savings will grow to Rs 3.97 crores per annum. This takes care of capital appreciation in the property by up to 4.32% p.a. This means, if the property appreciates at the rate of 4.32% p.a., you can purchase the house after 20 years from your savings.

At 8% per annum, these savings will grow to Rs 5.26 crores. This is enough to meet the capital appreciation of up to 5.88% in the property price.

At 10% per annum, the savings will grow to Rs 7.09 crores. This is good enough to handle appreciation in property price of up to 7.47% p.a.

Could the results be different?

We have made several assumptions about rental yields, loan interest rates and percentage increase in rentals. If we change the assumptions, the results could be different.

The numbers can tilt towards the purchase of the house

  1. If the rental yields were higher
  2. If the loan interest rates were lower
  3. If the house rent increases at a higher rate
  4. If the property prices appreciated faster

The numbers can tilt towards renting the property

  1. If the rental yields were lower
  2. If the loan interest rates were higher
  3. If the house rent increases at a slow rate
  4. If the property prices did not appreciate fast

What does this all mean?

I do not intend to settle Buy vs Rent debate. There are many factors that can’t be quantified.

For instance, for many, home ownership is a status symbol. Home ownership may provide a sense of financial security and emotional comfort. Your family may want that your kids grow in a house you own. You can’t price memories, can you?

On the other hand, how do you price the flexibility that staying on rent offers you? You can shift within the city or to a different city without breaking your head too much. Your new office is far away from your current residence. You can shift to a house that is closer to your new office. You can choose the size of your house depending on your requirements. Had you bought a house and the area didn’t develop as well as you expected, you would be worried. Not when you have rented the house.

My analysis only looks at the financial costs. There is no consideration to the subjective and emotional aspects.

I only want to disprove the belief that the house rent is a waste of money and that buying a house on a home loan is a better choice. Mathematically, it is not. You pay the rent even when you borrow from the bank. And as we saw above, the two rents are almost equal.

In my opinion, you must plan to purchase a house at a place where you can settle after retirement. And you must purchase this house before you retire. Even though you do not plan to buy anytime soon, keep planning for it by making the right investments. If you have an ancestral house where you would want to settle after you retire, you don’t have to plan for this house purchase. You might ask why no mathematical analysis for this. In my opinion, beyond an age, you would not want to shift too many places and I attach a lot of value to this aspect. You don’t have to feel the same way. If the house rental industry could become more professional, my opinion can change.

About residential real estate as an investment, I won’t be very keen as long as rental yields are very low. With low yields, the entire bet is on capital appreciation, which is a bit tricky. The real estate market is heterogeneous. Everything depends on your investment skills (picking the right location) and partly on your luck.


18 thoughts on “Rent vs. Buy: Paying Rent to the Owner or Rent to the Bank?”

  1. Very good Analysis. It broke the common myth that buying a house with bank loan is financially benefitial than renting the house

  2. The house owner can ask the renter to vacate the premises with 2-3 months notice. It’s worth owning and living in a house just to insulate oneself from such a possibility. Everything cannot be quantified in terms of money alone. And after a certain age one wants to put down roots instead of moving again and again.

    1. Agree. The decision can’t be completely mathematical. I had put this point in the post.
      At the same time, uncertainty is with buying too. eg. Developers not delivering, poor construction quality, problematic neighbours 🙂

  3. This is a very sensitive topic, and has been addressed with due maturity and knowledge. A very relevant topic, now more than ever. The real estate market is a sham, and people are growing increasingly vary of it. For the average person, looking to invest in a house, builders and real estate agents laugh their way to the bank, while forcing the buyer to pay an arm and a leg. Nevertheless, a decent, ‘dream-home’ is rarely ever achieved.
    Jobs nowadays also are not the long-term commitments they used to be, forcing the individual to shift from base-to-base very often. It is tragic that the common man has to endure to such a degree, just to provide a roof over themselves and their family.
    well done on the explanation, though!

  4. Very good analysis Deepesh, Thank you. There has been a transformation from the older generation who had permanent work location, stable jobs, and sufficient income to take a housing loan .Choosing to pay lowest EMI for 20 years and owning a house was the biggest achievement in their lifetime . However , for the new generation with unstable high paying jobs and frequent change of work locations , it becomes viable to choose a location to settle late. Its advisable to always save not just the own contribution for building or purchasing your house but contribute at least 70% and take remaining 30% for the loan . Banks always works the maximum eligibility eating almost 55% of your income for home loans making the consumer to choose high value properties , whose valuations may not grow higher than the interest rates in the early years of the loan term. Most importantly a person who pays the EMI on time during the initial period of the loan term , he will be forced sacrifice all his/her wishes which needs a higher spending like a family trip , car, gifts , recurring educational expenses etc . Something no one quantify is the peace of mind of not having a housing loan EMI .

  5. Dear Deepesh,
    This is the exact reason why I am staying on rent after moving out of ancestral house in 1994. This has given me lot of flexibility in moving to different cities in Kerala,Tamilnadu and now in Maharashtra.

  6. Sandeep Mehra

    Nice article. It would have been more interesting from analysis perspective if prepayments have been included. For home owners, prepayments of principal or increasing EMI by 15%-20% drastically reduces the interest burden. Home owner can provide home as their collateral for availing working capital loans for their other ventures….
    Rentals do not provide any scope for any modification and in India tennants are treated very differently…I personally faced this for couple of years…

    Yet, I agree that from financial perspective, rent is better if property value is same for rentals and ownership for analytical purposes.

    One planning which I did is I used to pay 35,000 as rent for 1.6 Cr property however when I deciding to purchase my own home, I chose a remote but green society which is valuing much lesser. In this way, one can be owner within the same cash outflow which he / she used to bear as tennant.

  7. Suyash Srivastava

    Dear Shri Deepesh,

    You have surely highlighted some important aspects a buyer should know before he purchases any property.

    But, now when the Housing Loan Interest is down to as much as 6.90% (and in near future it is expected to touch it’s lowest ever), do you still believe owning a house will not be a handsome deal as compared to renting?

    I am a Central Government Servant, currently posted in New Delhi. My Wife and me wish to purchase a flat in Noida. She is a Senior Consultant at an IT Giant in Noida. But as you explained owing a house will hamper your flexibility in moving to different places, mine is also a All India Transferable Job. Wherever, I am posted, either I am alloted office accommodation or allowed to avail lease facility with fair amount. As per norms, if I own a house at my place of posting, I will be paid HRA. Similarly, if transferred to some other place, I would have a choice to select in between HRA and Lease Facility. My father owns a descent house in my hometown Lucknow.

    Please advise, whether I should proceed further in my purchase plan or should I wait for some better time.

    Thanking you in the Anticipation.

    With Best Regards

    Suyash Srivastava

    1. Hi Suyash,
      Difficult to answer this. Don’t know if there will be a better time. I guess you are talking about lower prices in real estate.
      There are so many things at play here.

      I get your point. Lower interest rates can bring loan EMIs closer to house rents.
      Hence, that might increase demand for residential real estate and possibly drive up prices, but that is just one dynamic. There are many others.
      For instance, Residential real estate in India is still unaffordable for many. Economy and developers are under stress. That can put downward pressure on prices.

  8. It’s a eye opening analysis but at the same time some observations which I feel, are not addresses
    1. A country like India, property appreciation has been much more than just 4.32%
    2. Talking about appreciation of down payment@6% plus monthly saving but income tax part on interest (which varies from 10% to 30%) is missed here so if we consider this then appreciation will be in the range of 4.2 % to 4.95

    1. Hi Surendra,
      Thanks for your feedback.
      1. I have considered various scenarios. But yes, for the renting decision to look better after 20 years, your investments have to do much better than appreciation in the price of real estate. No question about that.
      2. I am not sure if I got your question right. I understand including tax angle will change a few things (Section 80C, HRA, Section 24). I have considered that in the analysis because the impact will be different for different buyers. Btw, osne can use capital investments (and not FDs where interest is taxed at marginal rate) to reduce tax impact to an extent (especially those in 30% tax bracket).

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