Home Rental Vs Home Loan: As Interest Rates Drop, What Is Preferable?

RIO DE JANEIRO, BRAZIL – Owning a home is still the dream of millions of Brazilians. With the recent reduction of the basic interest rate, known as SELIC, the rates of real estate financing have also dropped in recent years.

In 2015, when the SELIC stood at 14.5 percent per year, the average rate of real estate purchase financing was around ten percent per year. Currently, with the SELIC at 2.25 percent, the five largest banks in the country (Itaú, Bradesco, Santander, Banco do Brasil and Caixa) are charging between 6.99 and 7.30 percent per year.

With higher rates, financial experts often said that paying rent was more advantageous than taking out loans to buy real estate. This was because the interest on bank loans was very high, while at the same time, financial investments were more profitable. In other words, with a little patience, investors would receive enough to cover the property’s value and would not have their income compromised for many years.

But did this scenario change with the drop in interest rates? The answer is no. Paying rent and investing capital is still a better option than taking out a loan with the bank – this is evidenced by the three simulations below.

Carlos Castro, financial planner for Planejar, explains the difference: Nowadays investors must try much harder than in the past to achieve a higher profitability than the SELIC. “A few years ago, Brazilians achieved attractive returns with little effort, with investment in fixed income, for instance. Today, they have to diversify more and take a greater risk. They can not have a conservative profile.”

Whoever makes a real estate financing must also consider the so-called total effective cost (CET) of the operation, which in addition to the loan’s nominal interest, also includes taxes, administrative and credit fees, insurance costs, and duties. The banks are free to charge as much as they want, as long as the CET does not exceed the ceiling of 12 percent per year in contracts under the Housing Finance System for credit lines corrected by the TR (Reference Rate).

Another factor that should be considered is the property’s appreciation. It is common for those buying a house or apartment to wonder how much the property can appreciate in the future. The affirmative is not wrong, but often the expected percentage is. Data from Fipezap show that over the past six years, real estate has appreciated by about four percent per year. But the market expected six percent.

Financial Planner and partner of ParMais, Jailon Giacomelli, calculated the value of a R$400,000 (US$80,000), R$600,000, and R$1.5 million property. He considered that the initial investment would be made with the amount that would be used as the financing deposit, which is approximately 30 percent of the total value. The monthly contributions are the difference between the installment and the rent. Check below:

R$400,000 property

Property value: R$400,000
Deposit amount: R$120,000 (30 percent of the property value)
Financing term: 30 years
Annual interest rate: seven percent per year
Nominal appreciation expected for the property: four percent per year (average calculated by FipeZap)
Rental amount: R$1,200 (about 0.3) of the property value

Invest the amount that would be paid as deposit for the financing of the property: R$120,000. In addition, invest the difference between the installment and the monthly rent. In this case, the difference is R$1,236.83 in the first installment. It should be noted that in the SAC amortization system the amounts are decreasing.

Financing
Value of the property sale in the future* R$1,297,359.00
(-) Brokerage cost six percent R$ -77,841.54
(-) IR capital gain (15 percent) R$ -134,603.85
(=) Net amount R$1,084,913.61
(-) 30-year accumulated inflation** R$ -724,544.63
Final amount R$360,368.98

*Considering a four percent annual appreciation of the property
**Inflation calculated on the total value of the property

Renting and investing the balance
Accumulated investment over 30 years* R$1,349,087.68
(-) IR income (15 percent) R$ -161,571.30
(=) Net value R$1,187,516.38
(-) 30-year accumulated inflation** R$ -464,220.79
Final value R$723,295.59

*Considering an annual yield of 160 percent of CDI
** Inflation calculated on the deposit amount and other invested amounts

R$650,000 Property

Property value: R$650,000
Deposit amount: R$195,000
Financing term: 30 years
Annual interest rate: seven percent per year
Nominal appreciation expected for the property: four percent per year (average calculated by FipeZap)
Rental amount: R$1,950

Invest the difference between the installment and the rental every month. In this case, the difference is R$2,004.57 in the first installment. It should be noted that under the SAC amortization system the amounts are decreasing.

Financing
Value of the property sale in the future* R$2,108,208.38
(-) Brokerage cost six percent R$ -126,492.50
(-) IR capital gain (15 percent) R$ -218,731.26
(=) Net value R$1,762,984.62
(-) 30-year accumulated inflation** R$ -1,177,385.03
Final value R$585,599.59

*Considering a four percent annual appreciation of the property
**Inflation calculated on the total value of the property

Renting and investing the balance
Accumulated investment over 30 years* R$2,187,664.70
(-) IR income (15 percent) R$ -262,149.46
(=) Net value R$1,925,515.24
(-) 30-year accumulated inflation** R$ -751,903.86
Final value R$1,173,611.38

*Considering an annual income of 160 percent of CDI
** Inflation calculated the deposit amount and other invested amounts

R$1.5 million property

Property value: R$1.5 million
Deposit amount: R$450,000 (30 percent of the property value)
Financing term: 30 years
Annual interest rate: seven percent per year.
Nominal appreciation expected for the property: four percent per year (average calculated by FipeZap)
Rental value: R$4,500 (about 0.3) of the property value

Invest the balance between the installment and the rent every month. In this case, the difference is R$4,614.91 in the first installment. It should be noted that in the SAC amortization system the values are decreasing.

Financing
Value of the property sale in the future* R$4,865,096.27
(-) Brokerage cost six percent R$ -291,905.78
(-) IR capital gain (15 percent) R$ -504,764.44
(=) Net value R$4,068,426.05
(-) 30-year accumulated inflation** R$ -2,717,042.38
Final value R$1,351,383.67

*Considering a four percent annual appreciation of the property
**Inflation calculated on the total value of the property

Renting and investing the balance
Accumulated investment over 30 years* R$5,040,170.48
(-) IR income (15 percent) R$ -604,114.20
(=) Net value R$4,436,056.27
(-) 30-year accumulated inflation** R$ -1,731,374.62
Final value R$2,704,681.65

*Considering an annual yield of 160 percent of CDI
** Inflation calculated on the deposit amount and other invested amounts

Despite the calculations, the purchase of a property is not only rational, according to financial planner Jailon Giacomelli. “There are several issues that must be analyzed. Sometimes, people paying rent do not feel comfortable in their minds and can’t even sleep. The emotional factor must be considered.”

Source: Exame