What is it and how is it calculated?
their own home. Mortgage lenders attach certain conditions to the granting of a mortgage. Affordability and lending are two of the most important key figures that you need to consider when looking for the right mortgage. The level of affordability and lending also plays an important role in negotiations for the best mortgage interest rate. We explain how mortgage lenders in Switzerland calculate affordability and lending. We also give specific tips on how you can influence these two key figures. And thus pave the way to home ownership.
Affordability is a key figure that measures the ratio between your income and the recurring costs of your property. As a rule of thumb, one third applies. No more than 33% of your income should be spent on the property. This ensures that you can keep the property in your possession in the long term. Affordability is a theoretical value used by the mortgage lender to assess the mortgage application. However, it also helps future homeowners to bring more transparency to their budget planning.
To calculate affordability, all expenses are divided by total income. Roughly speaking, the resulting value should not exceed one third, or 33%.
All household income is added together, which is why it is often referred to as household income. In most cases, gross income is relevant here, i.e. earned income before deduction of social security contributions (AHV/IV and pension fund contributions).
Now a special feature comes into play. Imputed mortgage interest rates are used to calculate affordability, rather than the actual interest rates currently in force (which, historically speaking, are significantly lower than the long-term average). The imputed interest rate varies depending on the mortgage provider, but is usually around 5%. This is due to regulatory reasons based on guidelines issued by the Swiss Financial Market Supervisory Authority (FINMA). In this way, regulators and mortgage institutions ensure that the mortgage is affordable not only today, in an interest rate environment of 2-3%, but also in stressful situations. One such stress situation was the 2008 financial crisis, when mortgage interest rates were around 4-5%.
Incidental costs are calculated at 1% of the property value in the affordability calculation and include, among other things:
The 1% often proves to be too high for two reasons. Firstly, the energy efficiency of the property is not taken into account at all. Secondly, as mentioned above, the basis is the value of the entire property, including the land value. To make matters worse, if the land value increases over time, this is fully taken into account in a subsequent, new affordability calculation.
Both of these are shortcomings or errors in the calculation system, but unfortunately they are also something that you, as a mortgage borrower, cannot really do anything about.
However, some financial institutions have recognised this problem and reduced the amount of ancillary costs in the affordability calculation to 0.75%, for example..
So when choosing your mortgage, be sure to check the details. Or seek the support of an independent mortgage advisor.
To help you navigate this jungle of numbers, we have created an affordability calculator. It calculates your affordability online and gives you an initial rough estimate of feasibility.
Lending can be improved by increasing the proportion of own funds. This can be done directly or indirectly. With the direct method, own funds are contributed as hard equity, i.e. in the form of cash in the account. The indirect method involves pledging the respective credit balances in favour of the mortgage institution.
Home buyers are often supported by their parents or grandparents through advance inheritance payments. But these are not the only options available. Here is a selection of other options:
The classic way to generate more own funds from cash reserves and investments.
Funds from pillar 3a and the vested benefits foundation can be used for owner-occupied residential property, either as a pledge or as an early withdrawal.
Perhaps you have a life insurance policy or other insurance solutions, each with a surrender value. These could be pledged as additional security if necessary.
An advance of inheritance from parents or grandparents often paves the way to the dream of owning your own home.
A loan can also help. However, it should be noted that any loan interest will reduce affordability. In addition, not all banks unconditionally accept loans from people who are not directly related to you (e.g. family members).
Focusing purely on the current interest rate, the Saron mortgage is cheaper than a fixed-rate mortgage.
However, it should be noted that interest rate rises are to be expected with the Saron mortgage. The SNB has announced that it will continue to raise the key interest rate. The market expects 1-2 interest rate hikes of 0.25% to 0.50% each by the end of 2023. This would mean that the Saron would be between 2.41% and 2.91% at the end of 2023, making it more expensive than a 5-year fixed-rate mortgage and possibly even more expensive than a 10-year fixed-rate mortgage. However, the market consensus for 2024 is that the Saron will fall again.
The team of experts at MY HYPOTHECA looks forward to an initial consultation.