Affordability and the loan-to-value ratio
A mortgage must be affordable and the loan-to-value ratio appropriate. Comparis explains what this means and shows you how to calculate affordability.
08.11.2024
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1. What does affordability mean?
The affordability shows the proportion of income that would theoretically have to be spent on property costs if the interest rate were to rise.
These calculations are often used for the affordability calculation:
Calculated interest rate (often 5%)
1% of the property value for maintenance and ancillary costs
1% for amortization if the loan-to-value ratio is more than 66%
A rule of thumb is that a mortgage is considered affordable if at most one third of household income is sufficient to cover interest, ancillary costs and amortization – assuming a mortgage interest rate of 5%.
If the affordability rate is more than 33%, many mortgage lenders refuse to provide financing.
The Swiss Financial Market Supervisory Authority (Finma) does not set any specific quantitative requirements for the affordability of mortgages. Instead, it recognizes the self-regulation developed by the Swiss Bankers’ Association (SBA) as minimum standards. These guidelines (available in German only) define qualitative requirements for the credit check, valuation and settlement of mortgage-backed loans.
Example of sufficient affordability – where the loan-to-value ratio is below 66%
| Property value | CHF 700,000 |
|---|---|
| Mortgage | CHF 400,000 |
| Gross income | CHF 100,000 |
| Expenses | CHF 27,000 (CHF 20,000 interest charge, CHF 7,000 maintenance costs) |
| Affordability | 27% (based on an income of CHF 100,000) |
Example of inadequate affordability – where the loan-to-value ratio is 66% or above
| Property value | CHF 700,000 |
|---|---|
| Mortgage | CHF 500,000 |
| Gross income | CHF 100,000 |
| Expenses | CHF 37,000 (CHF 25,000 interest charge, CHF 7,000 maintenance costs and CHF 5,000 amortization surcharge) |
| Affordability | 37% (based on an income of CHF 100,000) |
2. What does the loan-to-value ratio mean?
The loan-to-value ratio is the percentage of a property’s value financed by a mortgage. It is an important criterion for banks and insurance companies when granting loans.
Example calculation of the loan-to-value ratio:
| Property value | CHF 1,000,000 |
|---|---|
| Mortgage | CHF 650,000 |
| Loan-to-value ratio | 65% |
What is the maximum loan-to-value ratio?
According to Swiss banking guidelines (not available in English), in the case of mortgages for owner-occupied residential property, at least 10% of the property value must be financed by capital that does not come from the pension fund (second pillar).
In most cases, mortgage institutions do not grant mortgages if the loan-to-value ratio is over 80%.
Tip: you can easily calculate affordability and your loan-to-value ratio using the Comparis mortgage calculator.
3. What can I do if the loan-to-value ratio is too high?
Does this mean there’s no hope for your dream property? Not necessarily. What can you do to bring the loan-to-value ratio to 80% or lower?
In principle, you have two options:
Reduce the purchase price
You can try to negotiate down the selling price. However, this can be difficult depending on the demand and estimated value of the property.
Increase equity
Increase equity by withdrawing pension funds early from the second or third pillar.
This article was first published on 12.02.2011
