Understanding the Challenges of Homeownership in a Changing Market: Can You Still Afford Your Dream Home?

But why is the situation so tense recently?

The capital market and key interest rates, which are crucial for the real estate market, have been rising since the beginning of 2022. Most recently, the Swiss National Bank (SNB) surprisingly left the key interest rate at 1.5%, but an imminent increase to 2% is considered likely.

The interest rates for fixed and money market mortgages, so-called Saron mortgages, have risen sharply as interest rates have risen. According to a study by the online comparison service Moneyland, the interest rate on Saron mortgages averaged 2.61% at the end of October and is therefore at the same level as comparable six-year fixed-rate mortgages. Fixed-term mortgages with shorter terms are slightly cheaper than Saron mortgages, while longer-term mortgages are slightly more expensive.

“Purchasing real estate continues to be worthwhile in many cases. It just needs to be planned professionally.”

Rising interest rates naturally make real estate financing more expensive. A calculation example: A family that purchased a property for 1,800,000 francs with 20% equity takes out a mortgage of 1,440,000 francs. Before the interest rate change, they had to pay an average interest rate of 0.8%. Today their mortgage interest rate averages around 2.6%. The family now has to pay 37,440 francs in interest annually instead of 11,520 francs. This means your monthly burden increases from 960 to 3,120 francs. Follow-up financing can become even more expensive.

What is also stressful is that the cost of living, health insurance contributions as well as energy and electricity costs are currently increasing significantly. To be on the safe side, the entire budget should be recalculated.

Because a residential property not only has financial value, but also a high emotional value for the owner, the purchase of real estate is still worthwhile in many cases, but it should be planned professionally.

But what does affordable financing look like and what should you pay attention to?

At least 20% of the purchase price or market value of the property must be contributed as equity. This can consist of savings and securities balances, pension funds from the 2nd and 3rd pillars, life insurance and other sources, such as inheritance advances.

Anyone who wants to purchase a property in a region with high price increases or a luxury property must expect significantly higher equity requirements, as banks price the properties to be financed according to the lower of cost or market principle and not according to the purchase price.

As part of the affordability calculation, it is checked whether mortgages of a maximum of 80% of the investment amount can be financed in the long term, even with higher interest rates (over 5%). With solid financing, the mortgage costs (mortgage interest, mandatory amortization of mortgages up to a maximum of 65% of the lower value of the property, maintenance and additional costs) may not amount to more than a third of the gross income. A look at the current situation is not enough. In the event of disability or death of a spouse, or at the latest when the fixed-rate mortgage expires, the bank will reassess affordability. If this is not the case and additional equity capital is not available, in the worst case scenario there is a risk of a forced sale.

How will the property last after retirement?

If you want to spend your retirement in your own home, you should make provisions in good time. When purchasing and planning the amortization of home ownership, affordability after retirement must be taken into account (see also infographic). If the bank determines that the calculated loan affordability is no longer given due to the reduced income, it can demand repayments.

From a tax perspective, it is not very opportune to reduce the mortgage burden year after year through direct repayments due to the current imputed rental value. The decline in debt reduces the deductible interest on debt and the tax burden due to the imputed rental value increases continuously. It therefore makes more sense to have indirect amortization through fixed monthly savings rates using tied (pillar 3a) or free (pillar 3b) pension provision.