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Owning is cheaper than paying rent. Even after retirement, as long as mortgage interest rates are as low as they are today. But as soon as you have to live off your pension, the question of the mortgage affordability arises. The affordability calculation is one of the central elements of a banks' credit assessment. They put mortgage interest, amortisation and ancillary costs in relation to income and calculate affordability using an average interest rate, the imputed interest rate. Housing costs may not exceed 35 percent of the household's gross income. This is why homeowners must repay the second mortgage by retirement at the latest. This also applies after retirement, although many homeowners have to manage with 30 to 40 per cent less income than before.
The imputed interest rate can vary. Almost all banks calculate at 5 percent. Although platforms such as UBS key4 mortgages offer money market mortgages from 0.54 percent, 5-year fixed mortgages from 0.55 percent, 10-year fixed mortgages from 0.75 percent or 15-year fixed mortgages from 1.30 percent (as of 17 May 2021). With the high imputed rate, the banks are playing it safe: those who meet the affordability calculation can probably cope with rising interest rates. In this way, the banks protect their mortgage borrowers from over-indebtedness and themselves from defaults.
The affordability calculation is simple. You have to calculate your housing costs and put them in relation to your income. An example: You buy a single-family home for 1 million francs and have 200,000 francs in equity (20 per cent). In order to be able to finance your dream home, you have to take out 640,000 francs as a 1st mortgage (up to 65 percent) and 160,000 francs as a 2nd mortgage (the rest up to 80 percent). The banks are not allowed to go above 65 percent for the 1st mortgage, and you have to repay (amortise) the 2nd mortgage in 15 years or until you retire.
Housing costs may not exceed 35 percent of your gross household income. This means you would need an income of around 173,335 francs a year or 14,445 francs a month to meet the affordability criteria.
Gross income includes all income and other regular income of the (jointly liable) spouse or cohabiting partner, excluding high bonuses or premiums.
The big hurdle for many homeowners after retirement is income. With the income from the first pillar (AHV) and second pillar (BVG), most people reach 60 to 70 percent of their pre-retirement income. This is enough to live decently, but often too little to meet the banks' strict affordability criteria. That is why homeowners have to pay off their second mortgage before they retire. This reduces the mortgage interest burden and eliminates the amortisation obligation, which noticeably relieves the affordability calculation.
In our example, you meet the affordability guidelines with a gross household income of 120,000 francs per year or 10,000 francs per month. Thanks to less interest and no amortisation, this is around 31 percent less than before - but still a lot of money.
If the amortisation of the 2nd mortgage is not enough, you can also voluntarily repay part of the 1st mortgage and thus further reduce the interest burden. If, for example, you have CHF 500,000 in pension assets from pillar 3a or 3b and use CHF 240,000 of them to pay off the 1st mortgage, the affordability calculation looks quite different.
Jetzt genügt ein Brutto-Haushaltseinkommen von 85'715 Franken im Jahr oder 7143 Franken im Monat. Das sind fast 51 Prozent weniger als vor der Pensionierung und dürfte in vielen Fällen reichen.
Think about it: This calculation is only about affordability (with the high imputed interest rate of 5 per cent). The actual housing costs are much lower, for example, with a 10-year fixed-rate mortgage at the current 0.75 per cent: 3,000 francs for interest plus 10,000 francs for ancillary costs, that makes 13,000 francs a year or just under 1,084 francs a month.
At first glance it seems tempting to reduce the mortgage debt and thus the interest burden with money from the pension fund or to use it to repay the 2nd mortgage. However, if you draw too much money from the 2nd pillar, you will receive less pension - this reduces your gross household income and the affordability calculation could tip because you receive too little income. This could have consequences for you because most banks will no longer top up a mortgage once housing costs have exceeded 35 percent of gross household income.
It is better to keep some money aside so that you have enough financial leeway and are flexible in case you run into a temporary shortage.
From the age of 50, you should start thinking about your retirement. Especially as a homeowner. Some banks are reluctant to provide financing for customers over 50. If you want to take out or extend a second mortgage that has to be repaid in 15 years or by retirement at the latest, your annual repayment obligation increases with each year of age. For example, if you are 55, you will only have 10 instead of 15 years to repay the 2nd mortgage. The higher annual amortisation naturally also affects the affordability calculation.
That's why it's worth giving it some thought early on. You should first discuss this point with your partner and then with your bank:
You will need some documents for your considerations and the consultation with your bank. Among other things, the pension certificate of the pension fund, the pension calculation of the AHV, your tax return or the account statement of the pillar 3a.
Older homeowners in particular like to take out fixed-rate mortgages with longer terms. On the one hand, because they can budget to the nearest franc and centime, and on the other hand, because they want to benefit from the low interest rates and live cheaply for as long as possible. However, fixed-rate mortgages have two major disadvantages, the second of which should not be underestimated, especially after retirement:
Take out cheap money market mortgages after retirement, watch interest rates closely and take out a fixed-rate mortgage as soon as the market turns around sustainably.
The older you get, the more short-term you should finance your residential property. If you still take out a fixed-rate mortgage with a term of 10 or even 15 years at a ripe old age, the risk is great that it will be difficult to divide the inheritance. There are banks that require early cancellation of the mortgage if the borrower dies. This can be expensive and in the worst case force the community of inheritors to sell the house or flat.
From the age of 75, it is better to take out only short-term fixed-rate mortgages if you no longer have the time or inclination to watch interest rates. With a so-called cap, you can protect yourself against rising interest rates. You pay a premium for this, but you can sleep peacefully.