Since the real estate crisis of the 1990s, Swiss banks have been paying close attention to the credit standing of their customers before granting a mortgage loan. It’s a precautionary measure justified by mortgage rates given that they have reached almost 10% in the past.
What are the holding costs?
This so-called “holding costs” are the financial ability of a household to pay off a mortgage loan. It is assessed according to the available income, the housing value, interest and repayment requirements. Following the calculation, the amount to be paid monthly must be less than 33% of the household income. Just like leasing, you must be having a salary that is 3 times higher than what the bank is requesting.
It's while calculating that you feel the impact of the famous crisis of the 1990s. By prudence and obligation, the banks do not base themselves on the current rate (which is historically low) which it plans to charge the borrower, but on a higher notional rate of around 5% on average. It’s a choice that allows them to ensure that a potential future rate hike can be assumed by the household.
When you want to buy a property with the help of the bank, it is mandatory to pay a minimum of 20% of the price of the property, the maximum mortgage being able to cover the remaining 80%. The capital used may come from different sources:
- Épargne
- Savings
- Securities
- Advancement of inheritance
- Third party loan
- Stand-alone services
- Land
- Pension fund (up to 10% or more)
How to calculate the cost of a mortgage?
Concrete example: a couple wishes to buy a house in Savigny, the price of which is CHF 1,000,000.
Let’s imagine that you want to finance this property with 20% of capital (CHF 200,000) and 80% of mortgage loan (CHF 800,000).
To repay this loan, you will obviously have to pay the interest rate (let’s say 1.5%) until the entire loan is paid = CHF 12,000 annually
Then there is the amortization which must be paid over a maximum of 15 years. The amortization is calculated as follows: your mortgage - 65%. In our example: 80% - 65% = 15% (percentage which represents the maximum possible since the mortgage cannot exceed 80%). Consistently, this amounts to paying 1% of your mortgage each year = CHF 8,000 annually
Finally, the bank takes into account the maintenance of the property and estimates it on average at 1% = CHF 10,000 annually
To sum up:
| Price of the property | CHF 1,000,000 | |
| Capital | CHF 200,000 | |
| Mortgage | CHF 800,000 | |
| Amortization = 1% : | CHF 8,000 | "800,000 x 1%" |
| Interest rate = 1.5% : | CHF 12,000 | "800,000 x 1,5%" |
| Maintenance = 1% : | CHF 10,000 | "1,000,000 x 1%" |
| Annual payment: | CHF 30,000 | "8,000 + 12,000 + 10,000" |
| Required annual salary | CHF 90,000 | "30,000 x 3" |
If the loan is granted, you will pay approximately CHF 30,000 per year or CHF 2,500 per month.
But the bank, for the purpose of granting a mortgage loan, will not be based on the current rate (here it’s 1.5%), even if it is the one you will pay. It will be based on the notional interest rate of 5%.
Here is how the bank calculates:
| Price of the property | CHF 1,000,000 | |
| Capital | CHF 200,000 | |
| Mortgage | CHF 800,000 | |
| Amortization = 1% : | CHF 8,000 | "800,000 x 1%" |
| Interest rate = 5% : | CHF 40,000 | "800,000 x 5%" |
| Maintenance = 1% : | CHF 10,000 | "1,000,000 x 1%" |
| Annual payment: | CHF 58,000 | "8,000 + 40,000 + 10,000" |
| Required annual salary | CHF 174,000 | "58,000 x 3" |
The fictitious annual salary required is ultimately much higher and it may block access to mortgage loans.
Another subtlety concerns amortization.
Let’s imagine this time that you want to acquire this same property which worth CHF 1,000,000 and finance it with 40% of capital (CHF 400,000) and 60% of mortgage loan (CHF 600,000).
To repay this loan, you will still need to pay the interest rate (1.5% again) until the entire loan is paid = CHF 9,000 annually
In this case, there is no amortization since it is “your mortgage - 65%”
In this example, you are only asking for 60% of mortgage loan: 60% - 65% = -5% (which comes to zero). As long as your mortgage is 65% (or less) of the price of the property, you are not required to pay the amortization. = CHF 0 annually
Finally, the bank still considers the maintenance of the property: 1%. = CHF 10,000 annually
To sum up:
| Price of the property | CHF 1,000,000 | |
| Capital | CHF 400,000 | |
| Mortgage | CHF 600,000 | |
| Amortization = 0% : | CHF 0 | |
| Interest rate = 1,5% : | CHF 9,000 | "600,000 x 1,5%" |
| Maintenance = 1% : | CHF 10,000 | "1,000,000 x 1%" |
| Annual payment: | CHF 19,000 | "19,000 + 10,000" |
| Required annual salary | CHF 57,000 | "19,000 x 3" |
If the loan is granted, you will pay approximately CHF 19,000 per year or CHF 1,583.33 per month.
To grant this mortgage loan, in this case, the bank will calculate as follows:
| Price of the property | CHF 1,000,000 | |
| Capital | CHF 400,000 | |
| Mortgage | CHF 600,000 | |
| Amortization = 0% : | CHF 0 | |
| Interest rate = 5% : | CHF 30,000 | "600,000 x 5%" |
| Maintenance = 1% : | CHF 10,000 | "1,000,000 x 1%" |
| Annual payment: | CHF 40,000 | "30,000 + 10,000" |
| Required annual salary | CHF 120,000 | "40,000 x 3" |
Despite the lowest interest rates, the demands of financial institutions remain relatively high, which explains this difficulty in becoming a homeowner. If you are looking for mortgage loan, you can first perform a financial assessment of your situation by clicking here.
If you wish to learn more about the capital and its tax implications, simply click here
You want personal advice from a financing expert? Contact Strike, our financial partner, and get concrete solutions to meet your needs.
