So you want to buy your own home. In all likelihood, you are going to need a mortgage to do so. Comparis looks at the key issues you need to be aware of when financing your home purchase.
A cottage in the countryside or a slick city apartment – for many, this is a lifelong dream. Trouble is, not too many succeed in surmounting the various financial hurdles that can stand in the way. Banks and other mortgage lenders carefully examine whether or not a customer can afford a property. But what does that mean exactly? This article sheds light on the terms “affordability” and “loan-to-value ratio” and explains how you should go about buying a property.
Loan-to-value ratio – it’s all about the deposit
If you want to buy a home, you need to provide a deposit of at least 20 per cent of the property's purchase price. Looking at it another way, the mortgage provider will only lend a maximum of 80 per cent. The relationship between loan and purchase price is referred to as the “loan-to-value ratio”. The higher the loan-to-value ratio, the more you will owe the lender and the less you will need to pay as a deposit. If the lender's estimated value is lower than the purchase price, then the estimated value is used to calculate the loan-to-value ratio.
For example, a lender estimates the value of a property to be 1,000,000 francs and will provide a loan based on a loan-to-value ratio of 80 per cent. This means that the mortgage is 800,000 francs and the buyer needs to contribute a deposit of 200,000 francs. If the loan-to-value ratio were 70 per cent, the deposit payable would be 300,000 francs.
You can obtain money for the deposit from various sources, but 10 per cent of the purchase price must genuinely come from your own funds. These might include:
- Advancements on inheritance / gifts
- Pillar 3a savings
The other 10 per cent of the purchase price can take the form of a pension fund pledge or early withdrawal – but only if you will be living in the property yourself.
Tip: Make sure you don’t invest your entire savings in your new home. You should always put something aside to cover tax, fees and any unforeseen costs. A solid reserve of five per cent of the property's value is usually enough to be on the safe side.
Affordability – a question of income
It’s not just your capital that determines whether or not you can afford a property – your earnings are taken into account too. Lenders will only approve a mortgage if the monthly costs do not exceed a third of your gross annual income. The monthly costs include the interest and amortization (repayment) amount plus maintenance and additional costs.
As far as the mortgage rate is concerned, banks apply a notional interest rate of 5 per cent in order to calculate affordability. This ensures that you are still able to afford the mortgage payments if interest rates go up. So even if you can afford a property while mortgage rates are as low as they are, the lender will only offer you a mortgage if you can also manage to pay 5 per cent.
In addition to mortgage rates, lenders also factor in annual maintenance and additional costs at a rate of 1 per cent of the purchase price. Any amortization costs are also added on at a rate of 1 per cent of the mortgage amount.
For example, you wish to buy a house that costs 1,000,000 francs. You can put down a deposit of 300,000 francs, so the mortgage amounts to 700,000 francs. The costs are calculated as follows:
- The annual interest costs are 35,000 francs (notional interest rate of 5 per cent of 700,000).
- Amortization costs are 2,222 francs (if the loan-to-value ratio is greater than 66.66 per cent, two thirds of the mortgage must be paid off within 15 years at the latest. The annual amortization costs in this case are calculated based on the difference between 700,000 and 666,666 divided by 15).
- Maintenance and additional costs amount to 10,000 francs (1 per cent of 1,000,000).
The annual living costs for the property in question, as calculated by lenders, are therefore 47,222 francs. Since the ongoing costs should not exceed a third of your annual income, you would need an income of at least 141,666 francs.
For a quick and easy way to find out what you can afford, you can use the Comparis mortgage calculator.
Find your new home
Now you know what your home can cost, you can visit Switzerland’s largest online offering of property listings to find the right property.
Find a lender
As soon as you have found a property you like, the next step is to identify a lender offering the best mortgage deal. HypoPlus, a partner service of Comparis, will be pleased to help you with this task. All you need to do is fill in this form. The advisers of HypoPlus will be in touch as soon as possible.