Home ownership

Rent or buy – which option is better for you?

ANALYSIS
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Source: IstStock/ metamorworks

A range of factors can influence the decision to buy a home. Comparis can help with the decision-making process and provides examples illustrating the costs associated with home ownership.

Renting or buying – which is right for you?

Your income and savings are the two main factors that determine whether you can afford to buy your own home or whether you will have to continue to rent. The decision regarding your future living arrangements must also reflect your willingness to take risks and your need for flexibility.

What are the advantages of home ownership and the disadvantages of renting?

Creative freedom: you can redesign, renovate or modernize your property in any way you like as long as the changes are in line with legal requirements. Tenants have little creative leeway, and if they do make any alterations, they must return the property to its original state at their own expense when they move out.

Security: homeowners don’t have to worry about the landlord giving notice to vacate. Tenants, on the other hand, can have their contracts terminated at any time subject to the period of notice.

Tax advantages: mortgage interest is tax deductible, as are any expenses associated with measures taken to preserve a property’s value and any deposits in the renovation funds of condominium associations. There are no property-related tax breaks for tenants.

Retirement: homeowners have usually paid off most of their mortgage by the time they approach retirement. This means that they enjoy significantly lower housing costs than tenants when they retire.

Appreciation: well-maintained properties in attractive locations will usually increase in value over time.

What are the disadvantages of home ownership and the advantages of renting?

 

Financial resources: as a general rule, banks will only finance home purchases if borrowers meet their affordability rules and equity requirements.

Maintenance and repairs: regular investments are required to maintain the value of a property in the long-term. Heating systems must be updated to meet cantonal requirements. This is something tenants don’t need to worry about.

Depreciation: the property market is subject to fluctuations. The property’s selling price may end up falling below the price you paid for it.

Imputed rental value: homeowners must pay tax on the imputed rental value, which is declared as fictitious income.

Flexibility: tenants can move home for private or professional reasons at any time. You can soon end a tenancy agreement, but the process of selling a property can be more protracted. Homeowners risk having to pay an early redemption fee if they need to repay their mortgage prematurely.

What monthly costs are incurred by renting and buying?

For tenants, monthly housing costs consist of the net rent and ancillary costs. They also need to pay the rental deposit, which can be as high as three months' rent, and premiums for home contents and personal liability insurance. While these two insurances are not compulsory, they can be useful in the event of tenant damage. Including ancillary charges, renting a 4.5-room apartment (with 110 m2 of space) in the city of Zurich costs 3,073 francs (median value) (source: a Comparis analysis (not available in English). Across Switzerland, the average rent for a 4.5 room apartment is 1,742 francs.

For homeowners, housing costs consist of mortgage interest, repair and maintenance costs, insurance premiums and amortization payments. Homeowners should also put aside money for renovation work that may be required in future, especially if they live in an older building.

How much does owning a home cost per month?

The table below provides a simplified illustration of the monthly costs involved for two different properties. The loan-to-value ratio is around 80% in each case, while affordability is around 33%. A ten-year fixed-rate mortgage is taken out on the property, with an interest rate of 0.8% (information correct as at November 2020). The ancillary costs amount to 1% of the property’s value in each case. Any mortgage amount exceeding two thirds of the property’s value is repaid/amortized over a period of 15 years. For the sake of simplicity, the amortization amount is set at 1% of the total mortgage.

Apartment (4.5 rooms, 110 m2) in Zurich Apartment (4.5 rooms, 110 m2) in Switzerland
Purchase price (median)* CHF 1,650,000 CHF 814,000
Total income CHF 290,000 CHF 145,000
Deposit CHF 330,000 CHF 164,000
Mortgage amount CHF 1,320,000 CHF 650,000
Mortgage interest costs CHF 880 CHF 433
Amortization costs CHF 1,100 CHF 542
Ancillary costs and maintenance CHF 1,375 CHF 678
Total monthly costs CHF 3,355 CHF 1,653

*Source: Wüest Partner

The housing costs associated with a 4.5-room condominium are slightly higher in the city of Zurich in comparison to rental costs. When you consider the situation over the whole of Switzerland, however, then home ownership becomes a more favourable option. The pendulum swings clearly in favour of homeowners if amortization costs are not included. Amortization is essentially a form of compulsory saving. The amount spent on amortization is simply transferred from your account to the property. If amortization is factored out in the above examples, the monthly housing costs amount to 2,255 and 1,111 francs.