Flexibility vs. stability
Life plan
For many people, the decision to buy a house or an apartment is closely tied to their life goals. Family planning plays a central role, as the new property has to not only meet current but also future needs, as most homeowners don't want to move again for at least a few years, sometimes decades. Lifestyle is another key aspect that should be considered when choosing a location. Are you certain that living in the city or countryside is right for you?
In general, homeownership offers stability at the expense of flexibility. The reason is simple: a lease can be easily terminated, but selling a property and prematurely redeeming a mortgage is complex and expensive. If you already have some idea of where you want to go with your life in the next five to ten years, the time to buy a home may be right. On the other hand, if you think there may be significant changes ahead, it might be better to wait for a bit.
Career planning
Your employment plays a crucial role when considering becoming a homeowner. A stable career without the fear of a sudden loss of income makes it easier to secure favourable financing conditions with your bank or insurance.
Another advantage of a stable professional environment has to do with your place of residence. Selling a house or apartment is much more involved than terminating a rental lease. If you anticipate significant professional changes such as a change of workplace or a move abroad, it may not yet be the right moment to buy. This is not to say that selling your property shortly after buying is impossible, but buying a home is after all also a matter of emotions, and most homeowners likely wish to remain in their new home for more than just one or two years.
Financial requirements for buying a home
Switzerland has some of the most stringent criteria for mortgage approval. Coupled with high property prices, this poses a significant barrier for prospective homeowners, both in terms of income and cash. To determine whether you can afford a specific property, your bank or insurance provider will closely assess your affordability. A loan is only granted if the financial institution believes you can afford the property in the long term.
The aforementioned affordability criteria are set by law and can only be negotiated to a limited extent. For instance, if your income is much lower than required, the bank may have no choice but to deny you a mortgage. Nevertheless, financial institutions have some leeway, and a lot depends on the precise valuation of the property, your assets, your income, and the bank's risk assessment. This means that even when one bank has rejected your application for a mortgage, another may very well approve it. Hence, it is essential to not only approach one lender but to keep an eye on the rest of the market. A financial advisor with a professional network spanning banks and insurance companies is the quickest and easiest way to access all available offers on the market.
Collateral value
By law, banks in Switzerland are allowed to mortgage a property up to 80%. The so-called lower of cost or market principle applies, meaning that the collateral value corresponds to either the purchase price or the fair market value, whichever is lower. If a house is valued at CHF 1,000,000 and you buy it for the same amount, your bank will grant you a mortgage of CHF 800,000 based on a typical loan-to-value ratio of 80%. However, if the bank had appraised the property at only CHF 800,000, you would, according to the lower of cost or market principle, be eligible for a mortgage of only CHF 640,000, even if you paid one million. In other words, you have to cover the difference between the appraised value and the purchase price with a higher down payment.
Just like the affordability criteria, the loan-to-value ratio is set by law, but financial institutions have some room for interpretation. A lot again depends on how the bank or insurance company values the property. Therefore, it is advisable to start the financing process early. Consult with a financial advisor as soon as a property makes it to your shortlist, and have them value the property. This way, you will know precisely whether or not you can afford the property in question and thus avoid any last-minute surprises.
Down payment
Since the mortgage is limited to 80% of the property value, as a buyer, you must cover the remaining 20% of the purchase price in the form of a down payment. Within the Swiss legal framework about homeownership (Accession à la propriété du logement / Wohneigentumsförderung), it is possible to withdraw up to 10% of the purchase price from occupational pension funds (2nd pillar) when financing a owner-occupied primary residence. A withdrawal from the 2nd pillar has a significant impact on your retirement and should be discussed with a specialist.
Naturally, it is also possible to finance more than 20% of the purchase price from your own funds if you have the means. This affects your affordability calculation: a larger down payment reduces your mortgage interest, as the resulting mortgage amount will be lower. Additionally, your mandatory amortisation payments will decrease because you only need to redeem the portion of the mortgage that exceeds ⅔ of the property value. However, with a larger share in the property, you will increase your tax burden since the mortgage interest payments and the mortgage debt are deductible from your taxable income and wealth, respectively.
Income
In addition to the purchase price, which is mainly limited by your cash, the ongoing costs are the second major criterion in mortgage approval. When assessing whether to grant you a mortgage, the ongoing costs of homeownership are compared to your income to insure long-term affordability. As a general rule of thumb, your housing costs should not exceed one-third of your gross income.
The housing costs are comprised of various components. The following percentages correspond to typical values used by financial institutions:
- Mortgage interest (calculated at an imputed interest rate of 5%)
- Amortisation (approximately 1% of the mortgage debt)
- Maintenance and ancillary costs (approximately 1% of the property value)
To safeguard against rising interest rates, financial institutions require a healthy margin when determining affordability. For this purpose, they are required to use an imputed interest rate of 5%, which is well above long-term averages.
Your financial situation affects your financing offers
Besides flat-out approving or rejecting your mortgage, your financial situation influences what offers and conditions you will receive. The better your financial situation, the lower the perceived risk by the bank or insurance; accordingly, they will offer you the same mortgage at a lower interest rate. Having some additional cash – even if not used for financing the property – can help, too, as it may be valued as income by some financial institutions.
Market conditions: When is the best time to buy a home?
Seasonality
You might have encountered general statements from property owners or real estate agents before such as "You will never find a property in winter!" or "Searching outside the season is pointless!" While there are indeed seasonal trends, the differences nowadays are much smaller than one might assume. Moreover, they don't always have the consequences one might intuitively expect.
Let's take an example: Many real estate agencies report a kind of "winter lull," meaning fewer properties are sold during the Christmas holidays than during the rest of the year. However, for you as a buyer, this may end up being an advantage: if there are fewer buyers in the market, you face less competition and therefore have better chances of finding the right property.
Interest rates
The interest rate environment also plays a crucial role when deciding whether to purchase a home. When mortgage interest rates are low, opting for a fixed-rate mortgage allows you to secure against potential increases in interest rates for many years. In times of rising interest rates, however, many prospective homeowners may think twice about buying. Future expectations also play a significant role. If you as a buyer anticipate a decline in interest rates, you might choose to wait a few months. On the other hand, if you expect stable interest rates, you may have no choice but to adapt to the interest rate environment.
It’s crucial to note, though: Even when interest rates rise, the affordability criteria for mortgages remain unchanged, as banks have historically factored in an interest rate of 5%. If you were able to afford a mortgage before, you should still be able to do so today!
The current market favours buyers
Market data clearly show that since the beginning of 2022, the number of properties advertised for sale has steadily increased. The increase in supply is a direct result of longer listing durations due to lower demand from buyers. What is every seller’s worst nightmare works to your advantage as a buyer: you have a lot of listings to choose from. This also means that you will have more room to negotiate with sellers. The times when dozens of buyers were vying for the same property have become increasingly rare in most regions of Switzerland.
We find the right financing solution for your budget
Are you currently considering becoming a homeowner? Perhaps you've already found your dream property, but you're still unsure whether you can truly afford it.
Consulting with a financial advisor brings clarity and optimises your financial resources. At Strike, you'll receive personalised guidance from your dedicated expert on all financial matters related to your real estate financing and beyond. Your personal advisor handles all administrative tasks for you and analyses your income, assets, and pension situation to provide optimal advice on the financial consequences of your purchase. With our extensive network of over 80 financial partners, we can connect you with mortgage and insurance offers that best suit your situation.
The Strike team are here to help you turn your real estate purchase into reality. Make your purchase a success thanks to Strike, just like hundreds of satisfied customers before you!
