Let’s take a young couple, Jane and Mark Sample, as an example. Their condominium currently costs less than their previous rented apartment. With a combination of fixed-rate and Libor mortgages, they now pay just 1.3 percent interest on a 600,000 franc mortgage. When they bought their condominium two years ago, they had to meet all the standard financial conditions of the mortgage market. Their mortgage debt had to remain affordable even with a longer-term imputed mortgage interest rate of five percent. This affordability calculation takes account of mortgage interest plus the prescribed amortization costs, and adds a flat-rate sum of around one percent of the real estate value for maintenance and ancillary costs. This equals the fixed costs of the property and should not exceed one-third of the available gross income.
Case study: savings of 22,200 francs
The fact that mortgage interest rates are currently so low is relieving the financial burden of most households quite considerably. In our example, the difference between the imputed and effective interest rate is 3.7 percent. For Jane and Mark Sample, this means that they have to pay 22,200 francs less per year. It is very tempting to spend this money on something else – be it everyday purchases or a long vacation. As homeowners however, there are things you should calculate before you spend the money you‘ve saved. This is necessary for three reasons. Firstly, it is important to make sure you can finance your home in the longer term without anything to worry about. Secondly, you should put capital aside for future investments (e.g. renovation work). And thirdly, it is extremely likely that one day, interest rates will go up again.
Invest savings, but how?
There are some very good reasons for using your savings to create long-term reserves. But which savings and investment options are suitable for doing so? Real estate is usually kept for several years, so any available resources can be invested over a longer-term investment horizon. However, the investment duration should correspond to any future moves you have planned and/or the contractual term of your mortgage. It would make less sense simply to leave the money in an account, where it would earn hardly any interest at all in the current market environment. As a result, you should concentrate on longer-term investment options such as equities, investment funds or bonds.
In general, you should bear in mind the following points to draw up your own personal business plan:
- Make sure you always have enough liquidity to finance ongoing costs or unanticipated expenses. It is generally a good idea for your savings to amount to at least three times your usual monthly costs.
- Check whether you need to use free resources to increase your retirement savings. If you have not yet taken full advantage of the possibilities available, you might consider paying money into a pillar 3a. If there are gaps in your pension fund assets – for example if you withdraw money early to purchase residential property – it could make sense to close them. Remember that you are usually also entitled to tax breaks by saving retirement capital.
- Once your liquidity and retirement needs have been covered, any remaining assets are available for investing. Start by working out a strategy that is tailored to meet your needs, your risk profile and your goals in life as a homeowner.