Interest on mortgage loans remains temptingly low, making buying residential property an attractive option. If you haven't done it yet, you might want to seize the opportunity and move into your own four walls. But because careful planning is crucial, let us answer the most important questions.
Being close to retirement, do you even stand a chance of getting a mortgage? As a home-owner close to retirement, should you amortise or not? Does it make sense to withdraw money from your pension fund to finance residential property for your retirement, or should you use it to reduce what you owe on your mortgage?
Before answering these questions, we should first briefly outline how residential property is typically financed in Switzerland. Let us assume that the property you would like to purchase costs a million Swiss francs. To finance this property, you'll need a deposit of at least 20%, half of which must be deposited in cash. The other half can be raised through early withdrawals or the pledging of pension fund or 3a account assets or from life insurance policies that can be surrendered.
Deposit needed increases with age
When financing residential property, you can take out a primary mortgage for two thirds of the property's market value for an indefinite term. Secondary mortgages must be amortised within 20 years or before reaching retirement age. This shows that the older you get, the bigger your deposit needs to be; but also that annual amortisation rates go up, as the same amount has to be amortised over a shorter period of time. In addition, banks or insurers expect a buyer to be able to make an imputed mortgage payment of 5% at any time and use this as the basis for the calculation of the affordability of a mortgage. Financial institutions also attach great importance to a buyer's creditworthiness and solvency when deciding whether to grant a mortgage.
Sample calculation for a 50-year-old buyer
|Purchase price||CHF 1,000,000|
|Total mortgage||CHF 800,000|
|amount to be amortised by age 65||
|Affordability at 5%||Affordability at 2.7%*|
|Mortgage CHF 670,000||33,500||18,090|
|Mortgage to amortise CHF 670,000||6,500||3,510|
|Amortisation in 15 years||8,670||8,670|
|Ancillary costs (0.1% of the property's value)||10,000||10,000|
|Total annual payment||58,670||40,270|
|Total monthly payment||4,890||3,355|
|Required net income for financing||176,010|
*(current interest rate, e.g. interest-only mortgage over ten years)
If you have a bigger deposit, financing is easier to obtain. The ideal scenario, of course, would be if, in addition to the 20% deposit, you could also cover the other CHF 130,000 yourself, as this would have the advantage of obviating the amortisation. The older the buyer of the property in this example is, the more important this point becomes. If the buyer is 57, the secondary mortgage has to be amortised over eight years, which often makes obtaining financing impossible.
Your own four walls a money trap?
It is also possible for a buyer to be in a position to put down a deposit of far more than 33%, for example by using savings, withdrawing money from a pension fund or raising an advance on an inheritance. This buyer should, however, bear in mind that a large part of his or her assets would be tied up in the property and that if he or she withdraws money early from a pension fund, his or her old-age pension and survivors' pension would be reduced. Tying up too much capital in a property and reducing your pension income through early withdrawals may make it difficult or even impossible to raise a mortgage, as it may then no longer be affordable. In this case you may even find yourself forced to sell your beloved property as an emergency, for instance to finance the costs of care. The amount of your mortgage also has an affect on your personal tax situation.
Do you have questions about pensions and mortgages? You can contact the experts in our Centre for Pension Planning, who deal with retirement-related questions on a daily basis. They will be happy to share their expertise and comprehensive advice with you. Get in touch with our Centre for Pension Planning. Our experts will be happy to help.