Home decisions: Renting vs getting a loan
Question: My parents said, “Instead of renting, just use the rent money as amortization on the loan you will secure from a bank to buy your own home (translated from Filipino).” Are they right? We just got married and are quite confused [about] renting or buying our home.
Answer: Firstly, let us get this out of the way—I will be giving you advice based on your desire to buy a forever home. And by definition, a forever home is a house that you intend to live in for a very long period of time, perhaps even up to the time you take your last breath. I am also assuming you intend to buy a single detached house (i.e. as opposed to a condominium or townhouse).
Now, we need to make several assumptions. Best to bring out facial tissue as this may be a bit of a nosebleed.
Let us assume that you are looking at a single detached home that can be bought at P6 million or rented out with a gross rental yield to the landlord of 6.9 percent per year. Rental yield represents the annual rental income as a percentage of property market value, and according to ChatGPT, as of February 2025, 6.9 percent is the average gross rental yield for single detached houses in Metro Manila.
Therefore, if you choose to rent, such rent expense will be P414,000 per year or P34,500 per month. Let us further assume that your rent will increase by 5 percent per year.
Let us also assume that the property value will inflate by 5 percent per year, and so will the cost of maintenance. Household maintenance expense will be P300,000 per year, which according to ChatGPT, is the average maintenance expense for a mid-sized single detached home in Metro Manila, and the effective annual real property tax will be 0.3 percent of the property value.
Let us likewise assume that the loan collateral value or the percentage of the property value that can be lent out to you is 80 percent with the following schedule of interest rates: 9.75 percent for a 30-year loan; 9.125 percent for a 25-year loan; 8.5 percent for a 20-year loan; and 7.75 percent for a 15-year loan. These interest rates will be fixed for the duration of the loan.
And finally, let us assume that if you were to first rent, the equity that you do not need to immediately put up can be invested in a bond paying 4.5 percent net per annum.
If you were to secure a 30-year loan now, your monthly amortization would be P41,239.41 versus a monthly rent of P34,500. Moreover, you will need to already put up your equity amounting to P1.2 million. That does not sound so alluring. And even if you limit your monthly loan amortization to the amount of the monthly rent (i.e. P34,500), you would effectively be borrowing P4,015,576.19, which translates to buying a forever home worth only P5,019,470.24 and still with an equity of P1,003,894.05.
Some say that at least when you buy your home, you will enjoy the appreciation in property value. But remember, you will really only enjoy that appreciation if you sell your property, something we already established that you may not even opt to do because you are buying your forever home.
On the other hand, in scenarios where you delay securing a loan to buy your forever home by five, 10 or even 15 years, differential analysis shows that you will always be financially ahead by renting first in terms of time value of money instead of borrowing immediately to buy a home. Delaying your forever home acquisition to a time when you can really afford it will help you avoid being asset-rich but cash-poor.
Sure, buying a forever home is every family’s dream. But do not be rushed into buying your forever home. A house is just something you buy. A home can be made wherever you live, for as they say, it is where your heart resides.
Send questions via “Ask a Friend, Ask Efren” free service at personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook. Efren Ll. Cruz is a registered financial planner and director of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach
