Main obstacles: equity and affordability

Mortgage lenders finance a maximum of 80 percent of the property’s market value or purchase price, whichever is lower (see also lowest value principle). The value in question is the collateral value, i.e. the value on which the calculation of the maximum mortgage amount is based.

Conversely, this means that you must be able to cover at least 20 percent of the purchase price with your own funds in order to obtain financing. The second – and usually bigger – hurdle is creditworthiness. Your eligibility for a loan depends mainly on whether you can pay for your home in the long term – or in other words, whether it is affordable.

Let’s take a closer look at the two main conditions.

What counts as equity?

You may use the following sources to finance your home:

• Savings (bank accounts, securities custody accounts, pillar 3b, etc.)
• Retirement assets for home ownership from the pension fund (pillar 2) and fixed pension plan (pillar 3a)
• Gifts/inheritance withdrawals, loans

Please note that there is no fixed maximum amount for the equity share. The more equity you can put in over and above the required 20 percent, the more attractive your offers will be.

Property financing

If you want to take money from the 2nd pillar, the following rule applies: at least 10 percent of the collateral value must come from sources other than the pension fund.

There is no such restriction with pillar 3a; you can cover your equity share in full with these assets. However, please bear in mind that capital gains tax will be payable if you withdraw retirement assets. You should factor these costs into any anticipated withdrawal. Alternatively, you can also pledge the required retirement assets from pillar 2 or pillar 3a, which does away with the tax burden for the time being. 

Incidentally, retirement capital may be used only to finance owner-occupied properties, but not for rented properties (investment properties) – unless you live in part of the property yourself.

When are you deemed to be able to afford a property?

Affordability means that the annual cost of your property does not exceed 33 percent of your gross household income.

Gross household income includes:

• Annual salary of all applicants, including 13th month salary
• Bonuses (usually only partially taken into account, as they are not a fixed source of income)

Property costs include:

• Interest costs (at an imputed interest rate of 5 percent)
• Amortization 
• Running costs (1 percent of market value)

Interest costs are calculated using the higher imputed interest rate of around 5 percent instead of the effective interest rate. Reason: as a customer, you can still honour the mortgage even if interest rates rise.

Whether you have to repay each year and how much depends on the loan-to-value ratio. If it is above approx. 67 percent (second mortgage), mandatory amortization becomes due. This is because borrowers are obliged by law to reduce their mortgage debt to two thirds of the collateral value within 15 years or by the time they retire.

Running costs are costs for maintenance or repairs. Lenders usually charge a flat rate of 1 percent of the market value.

Double income is looked at closely

As part of the affordability calculation, various future scenarios are also examined in order to assess the risks. For example, a young, childless couple with double income may be asked whether one income would cover the running costs. This may be the case, for example, when a child is born and one parent stops working or works less.

Property factors: what is the property worth?

The property itself also plays a key role in mortgage lending. Its value ultimately forms the basis for the financing amount and therefore also for the affordability calculation.

For this reason, a property valuation is always carried out to determine the market value. The hedonic method is generally used for owner-occupied dwellings. The selling prices for similar properties in the region are taken into account and an average value is calculated. For investment properties, however, the capitalized earnings method is used, and affordability is also calculated differently.

The location and condition of the property are the key factors in determining its value. For example, any form of emission (noise, odours, exhaust fumes) reduces its value.

Can you afford your dream property?

Have you found your dream home and want to know if you can afford it? Use our mortgage calculator to find out quickly and easily if you can get a mortgage and on what terms.

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