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Created on 07.12.2023

How to keep your home affordable as you age

Imagine you’ve recently retired, have paid off the mandatory portion of your mortgage and are now looking forward to a carefree retirement. And then further partial amortization is due. But you don’t have the money. How can that be? And how can you prevent it?

Affordability is crucial

Affordability is the decisive criterion for granting or renewing a mortgage. It exists when the total costs for the house or apartment (mortgage interest, amortization and maintenance and additional costs) do not account for more than a third of the total income. 

The calculation is not based on the real interest rate, but on the fictitious, higher imputed interest rate of around 5 percent. This buffer is intended to ensure that you as a borrower can service the mortgage even if interest rates rise. This affordability calculation also applies to mortgage customers of reference age.

The variables governing affordability change with age

When you retire, however, the variables in the calculation usually change significantly. In most cases, income (consisting of OASI and pension fund) drops significantly, but housing costs usually remain at the same level. By reference age at the latest, your mortgage must be amortized to 67 percent of the property value. Even after retirement, an imputed interest rate of 5 percent is taken into account when calculating affordability.

Example – calculation before retirement

  • Property value: CHF 1,200,000
  • Mortgage amount: CHF 960,000 (80% of CHF 1,200,000)

Living costs

  • Imputed interest (5%) / year: CHF 48,000
  • Amortization second mortgage / year (CHF 960,000 – CHF 804,000 = CHF 156,000 / 15 years): CHF 10,400
  • Maintenance costs / year (1% of CHF 1,200,000): CHF 12,000
  • Total living costs (imputed interest, amortization, maintenance costs): CHF 70,400

Minimum income

Required minimum income: CHF 211,200

Example – calculation after retirement

  • Property value: CHF 1,200,000
  • Mortgage amount: CHF 804,000 (67% of CHF 1,200,000)

Living costs

  • Imputed interest (5%) / year: CHF 40,200
  • Maintenance costs / year (1% of CHF 1,200,000): CHF 12,000
  • Total living costs (imputed interest, amortization, maintenance costs): CHF 52,200

Minimum income

Required minimum income: CHF 156,600

Affordability barrier too high in old age

In the best case, affordability is retained in old age because income also reduces the interest burden to a sufficient extent and mandatory amortization no longer applies. But that is by no means certain. As the example above shows, financial demands in retirement can still be very high.

Above all, the imputed interest rate ensures that the affordability barrier remains too high for some pensions at retirement age. Even if you can easily pay the effective interest, the affordability calculation may mean that the financing is no longer affordable for you. To stay with the example above: if the homeowner’s pension is just 120,000 Swiss francs instead of the required 156,600 Swiss francs, the homeowner must amortize 240,000 Swiss francs to meet the affordability criteria.

In view of demographic change and the uncertain future of OASI, it is becoming increasingly likely that pensions will continue to decline in relation to earned income. It is becoming increasingly challenging for pensioners to maintain their home ownership.

Plan financing for retirement as early as 50

As a homeowner, you should consider your situation after retirement early on; by the age of 55 at the latest, but ideally at the age of 50. To do this, compare your expected pension (from your OASI and pension fund) with your expected calculated housing costs. The ratio should be at least 3:1. If a gap becomes apparent, you still have enough time to react.

Tip: allow for a generous buffer so that you are prepared for worst-case scenarios such as occupational disability or the death of a spouse.

Optimizing affordability in retirement: your options

You have three basic options for improving affordability:

  • Increasing your income after retirement
  • Reducing your imputed living costs through amortization

Which option is possible and best varies from case to case.

Option 1: Increase income

Of course, an increase in future pension income is possible only to a limited extent. However, ensure early on that there are no gaps in your pension provision by increasing your savings rate and, for example, by buying into the pension fund to increase future pension payments. It is best to consult a specialist in this regard and get advice on possible solutions such as insurance solutions. It may also be possible to one day rent out part of your house and generate income in this way. 

Option 2: Reduce imputed living costs through amortization

In simple terms, reducing costs means amortizing the mortgage in order to reduce interest costs. When it comes to amortization, you should not only keep an eye on the affordability calculation, but also on tax optimization – less interest also means fewer deductions and higher taxes. You should also be careful not to tie up all your assets in your property in order to have enough liquid funds available. So don’t pull out all the stops to amortize as much as possible, but rather just as much as necessary. The optimal amortization should be calculated individually. It is best to seek expert advice on this.

Option 3: Calculate freely available assets

If the pension is not sufficient to meet the affordability criteria, lenders with assets can also count a certain proportion of the existing liquid assets, such as account balances or securities, as fictitious income. This proportion ranges between approximately 4 and 5 percent.

Example:

  • Freely available assets: CHF 150,000
  • Percentage rates: 5%
  • Eligible “fictitious” income: CHF 7,500

Would you like to find out whether home ownership will remain affordable for you in old age?

Take the opportunity to get personal advice from our mortgage experts. We will discuss your personal situation and show you your options. Make an appointment at your chosen branch

Questions and answers

  • At the time of normal reference age, it can usually amount to only around two thirds of the property value. 

  • In the worst case, it will be terminated or not renewed, and the property will have to be sold. But that doesn’t have to be the case: your heirs may also be able to take over the house and the mortgage and grant you right of residence there. It is important that you deal with your financial situation in retirement early enough and contact experts. 

  • In old age, financing with shorter terms makes sense, depending on your life situation and any medium-term plans to sell the property. However, a long-term fixed-rate mortgage in old age cannot be wrong. Some borrowers agree on attractive conditions, and the property and mortgage can later be passed on within the family.

  • In the event of death, the property and the mortgage debt become part of the inheritance. Contractual obligations are therefore transferred to the heirs, be it the surviving spouse, the children or other heirs. The affordability is then reassessed.

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