Pension Keeping your home affordable in old age

Your income will typically drop after retirement, which can affect the affordability of your mortgage. How to prepare.

byUBS Insights 16 Oct 2019
Photo: UBS

In principle, calculating affordability is easy: A mortgage is considered affordable if your regular fixed costs do not exceed one-third of your disposable income. Fixed costs include interest, repayments and the ancillary costs of the property, and are calculated according to specific rules. After you retire, you will need to meet these costs from an income that could be considerably lower and will generally consist of payments from the AHV and your pension fund, ideally supplemented by private savings, for example from pillar 3a.

Calculating costs and income

Interest rates have been at historic lows for many years now. Even so, financial institutions use an imputed mortgage interest rate of 5% for their calculations plus 1% of the transaction value of the real estate for ancillary costs (date 2019). These rules also apply to retired persons, which is not without its consequences.

Nowadays, income based on AHV pension entitlement, pension fund assets and payments from private retirement savings can be structured more flexibly and individually than before. When planning for retirement, it is important that you make provision for an unexpected career change, for example. The traditional career path of studying or training and then working full-time until retirement – when possible for the same company – has become increasingly rare. Then there are inheritances (which can only be planned to a degree) or unexpected life changes, both before and after retirement. That is why we advise you to consider different options and to build up a financial cushion.

Retirement & Real Estate

Retirement and real estate are closely related. What you should keep in mind about home ownership during retirement?

What should you do?

Since affordability depends on a comparison of income and costs, there are two possible approaches: Try to increase your anticipated income after retirement or reduce your future costs. Of course you could do both. Which approach is better varies widely and can best be determined during a personal consultation.

As it is generally hard to increase your income after retirement, (partial) repayment of your mortgage is often the simpler option (see sample calculation). Even a relatively small repayment – in this case 75,000 swiss francs – can ensure affordability. Although this will permanently reduce your financial obligations, the same money will no longer be available for unexpected (or indeed everyday) outgoings. You can increase your retirement income, for example, by making additional contributions before retirement to make up for any shortfalls in pillar 2 or by saving money via pillar 3a. If you have enough living space, you might also consider subletting a lodger flat.

Naturally, there are also more radical solutions: selling your property, gifting it to your children or even looking for new living arrangements. The right approach will depend on individual circumstances and preferences, but planning early is always a good idea.

Why is the imputed interest rate 5%?

In order to stabilize the real estate market, as this is of central importance to the health of an economy. The purpose of such standards is twofold: First, to prevent a large number of mortgage holders from losing their homes if interest rates suddenly rise, leading to a glut on the housing market; second, to make it harder for a property bubble to arise, by preventing those who could only just afford to buy a property in today’s (exceptional) conditions from actually doing so.