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Affordability
You will not be able to get a mortgage if you can’t afford it – most banks will only finance a home if the financial burden is affordable. Find out how this is calculated and what measures you can take to ensure it.
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In order to fulfil your desire to own a home, there is usually no way around a mortgage. Whether one is granted depends primarily on two decisive factors.
On the one hand, future buyers should be able to raise sufficient equity – usually at least 20 percent of the market value of the property purchase price . In addition, before the purchase, the affordability must be assessed to ensure that the home can be financed in the long term. Only when both criteria are fulfilled can a mortgage be considered, which can fund the purchase of a home.
The affordability of a mortgage is a central factor when buying real estate and is calculated individually by banks. The running costs of the property are compared with your income. Your current income as well as the imputed interest, the planned amortization of the mortgage and the ancillary costs of the property are taken into account.
These factors are used to calculate the affordability rate, which is given as a percentage. Bear in mind that the lower the value, the better the affordability. A mortgage will only be given if the affordability rate is no higher than 33 percent.
How credit institutions calculate affordability
Financing structure | Financing structure | Amount in CHF | Amount in CHF |
|---|---|---|---|
Financing structure | Purchase price or bank loan-to-value basis | Amount in CHF | CHF 1,000,000 |
Financing structure | First mortgage (67%) | Amount in CHF | CHF 670,000 |
Financing structure | Second mortgage (13%) | Amount in CHF | CHF 130,000 |
Annual costs | Annual costs | Amount in CHF | Amount in CHF |
|---|---|---|---|
Annual costs | Imputed interest rate (5%) | Amount in CHF | CHF 40,000 |
Annual costs | Amortizations1 | Amount in CHF | CHF 8,700 |
Annual costs | Ancillary costs and maintenance2 | Amount in CHF | CHF 10,000 |
Annual costs | Total costs | Amount in CHF | CHF 58,700 |
Annual costs | Total income | Amount in CHF | CHF 180,000 |
Annual costs | Burden3 | Amount in CHF | 32% |
1 Amortization of the second mortgage within 15 years
2 1% of market value
3 Affordable means a burden of no more than 33%
The following factors are decisive in the affordability calculation and depend on the size of mortgage required and the purchase price of the residential property.
Our monthly interest rate forecast tells you about current interest rates and how they are likely to change – free of charge by email.
How credit institutions calculate affordability depends on the strictness of the standards set. For example, some banks do not count bonuses fully as income or at all. Some also factor a change or loss of job into the expected income. If a couple wants to take out a mortgage together, some banks even assume that the family’s workload and therefore income could change when a child is born. Ongoing financial obligations such as leasing contracts also reduce the income.
When talking to the bank you should plan realistically, taking into account any life changes and disclosing all income. This is the only way to ensure the property purchase will be financially manageable in the long term.
According to the Swiss Residential Property Price Index (IMPI), real estate prices have been rising sharply for years. Alongside rising prices, running costs for a property are also increasing. For example, if you want to buy a property for CHF 1 million, you need a regular income of at least CHF 180,000 per year, taking all variables into account, if you contribute 20 percent equity.
If you can increase the equity, the income required for affordability decreases. Bear in mind that at least 10 percent of the amount raised must consist of “hard” equity – i.e. account balances or funds from pillar 3a. The rest can be an early withdrawal from the pension fund.
If your savings are too low or you do not want to use your pension assets, an advance on inheritance or gift from your parents can also increase your assets. If you know early on that you want to buy a property, you should start taking the right savings measures immediately.
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When you reach retirement age, your income also decreases – sometimes drastically. This makes it all the more important to plan with the bank at an early stage how you can continue to ensure affordability. Ideally, you will have already paid off the mortgage or saved in pillar 3a so the income gap can be filled after retirement. However, this requires long-term financial planning and advice.
When they retire, many pensioners are also thinking about using part of their pension fund assets to pay off their mortgage. However, keep in mind that you will then have less long-term income from the pension fund at your disposal. This is also the case if you have already used part of your pension assets to increase your equity. The gap that has arisen here can only be filled by active buy-ins into pillar 2.
Affordability is an important factor in financing your own home. It ensures that owners of residential property can also cope with the running costs in the long term. If this is the case, this not only provides a certain level of security for the bank issuing the mortgage, but also you as the owner will know you have taken all important financial factors into account in your planning. In this way, you reduce the risk of financial issues after purchasing the residential property.
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