This article explores the math behind matching your EMI to your rent, highlights the role of rental yield and loan tenure, and helps you understand why leveraging your house purchase is a good decision.
You can see the click-bait headline:
How to buy a house for free by paying only the rent?
The house is of course not free. By paying an EMI equal to the rent, you have to first arrange for a large down payment. This article shows how large.
If you buy a house on a home loan, here are a few rules you need to be aware of:
Read more about home loans from the RBI website: RBI - Home Loan FAQs
Your EMI depends on the interest rate and loan tenure. Since we plan to pay no more than the rent of the same house as the EMI, we will take the longest period loan possible and pay it off earlier via salary hikes.
The bank will not generally grant a loan beyond your official retirement age (58-60 years usually). So depending on your current age, and how you structure the loan, your EMI can be lower by stretching out the loan.
Yes. That is a good thing actually assuming you take the benefit of leverage.
Leverage means using a loan to acquire assets that appreciate over time
A house is the only asset you can finance on loan apart from a college degree. No bank will give a loan for investing in its own share let alone the stock market. Car loans don’t count as well since cars are depreciating assets.
Now we will explain why prepaying a home loan is not a good idea if the only goal is to save interest.
Firstly, some basics:
If you have the extra money to pay over and above the EMI, you should first ask yourself:
Therefore, if your job is stable, you can pay off the loan as long as you need to without rushing to prepay. Of course, psychologically you will mostly feel better about getting rid of the debt. In such cases, you can prepay using a step-up EMI in line with salary hikes.
Rental Yield = Monthly Rent x 12 divided by House price
Here’s an example calculation to make rent and EMI equal:
Read more on calculating Rental Yield: What rental yield is and how it is calculated
To reduce the EMI to ₹25,000/month, the loan will be therefore be ₹25 lakhs since EMI will be:
1% of 25 lakhs = ₹25,000 per month
The table below shows the downpayment vs. the loan term and the rental yield like this for the same ₹1 crore house.
| Rental yield | Yearly Rent (lakhs) | EMI | 15y loan | 20y loan | 25y loan | 30y loan |
|---|---|---|---|---|---|---|
| 2.00% | 2.00 | 16,667 | 83 | 81 | 80 | 79 |
| 2.50% | 2.50 | 20,833 | 79 | 76 | 75 | 74 |
| 3.00% | 3.00 | 25,000 | 75 | 72 | 70 | 68 |
| 3.50% | 3.50 | 29,167 | 71 | 67 | 65 | 63 |
| 4.00% | 4.00 | 33,333 | 67 | 62 | 59 | 58 |
| 4.50% | 4.50 | 37,500 | 62 | 58 | 54 | 52 |
| 5.00% | 5.00 | 41,667 | 58 | 53 | 49 | 47 |
| 5.50% | 5.50 | 45,833 | 54 | 48 | 44 | 42 |
| 6.00% | 6.00 | 50,000 | 50 | 43 | 39 | 36 |
Use the table below effectively with these steps:
Once you have the row and the column, you will get the amount of downpayment as a percentage of the cost of the house.
This calculation is done using an 8.75% average home loan interest rate. Small changes in the interest rate (say 8.4-8.9%) will not materially change the result.
Four kinds of individuals and families can look to purchase a house with EMI equal to the rent:
Of course, if you are worried about a job loss, then taking a large home loan is not something you want to entertain and therefore a smaller home loan will be better.
This article brings together the interrelationship between the size of the retirement corpus, inflation, asset returns, longevity and the amount you wish to spend in retirement.
Published: 6 January 2025
9 MIN READ
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This post titled Can You Buy a House with EMI Equal to Rent? Here's How first appeared on 09 Jan 2025 at https://arthgyaan.com
