Mortgage affordability is crucial.
What does affordability mean?
Mortgage affordability describes the relationship between the ongoing costs of financing a property and the borrower’s income. The rule of thumb is that the costs of financing should not be more than a third (33%) of a borrower’s gross income. Lenders such as banks, insurers and pension funds check this in order to ensure that a borrower can afford the interest payments over the long term. Some lenders also grant mortgages when affordability is stretched, that is, when a borrower’s income covers less than a third of the financing costs. However, this is mostly on the condition that the product is a fixed-rate mortgage that is regularised to meet the standard affordability requirement of 33% over the course of its term.
How is mortgage affordability calculated?
Lenders need to know whether their customers can afford the ongoing costs of owning a home over the long term. This is why they pay close attention to affordability. This refers to the relationship between the total costs of having a mortgage and the household income of the borrower(s). The so-called affordability calculation is used to determine total costs. It’s important to note that the calculation for determining the ongoing costs of the mortgage is not based on the current or agreed (effective) interest rates. Instead, the calculation uses long-term average (imputed) interest rates – usually from 4.5% to 5%. This so-called imputed interest rate serves as an assurance on the part of the borrower in that it guarantees that they can still afford their payments even if mortgage rates rise. Maintenance and utility costs are set between 0.5% and 1% of the purchase price depending on the provider. To determine the exact percentage rate, the finance provider will draw on the age and energy efficiency of the property. Utilities for new builds or existing buildings that have been renovated to be made more energy efficient are lower than those for older buildings with high energy costs.
As a rule of thumb, the ongoing costs associated with the property should not be higher than one third (33%) of the household income. This includes all regular income including 13 months’ salary and any bonuses, with the latter typically only recognised at a reduced rate, e.g. 50% of the average bonus over the last three years.
What others wanted to know
Our customer advisors can provide answers to selected FAQs. Just tell us what you want to know. We will be happy to help you.
Philip E. (57), Richterswil
Can I still afford my mortgage after retiring?
Whether or not your mortgage is still affordable in retirement depends on your pension income. This pension is generally made up of the OASI pension and occupational pension fund income. Together, this will amount to around 60% of your previous income from employment. Depending on the lender, a drawdown of your assets may also be counted toward your retirement income. As with income from employment, your pension income must be over three times the costs of financing. If this is not the case, the sum of the mortgage must be reduced until the standard affordability rate of 33% is reached. It’s advisable to do this calculation early – at age 50 at the latest – to give yourself enough time to ensure affordability into retirement. The fact is that affordability in retirement is becoming a challenge for more and more homeowners. This is due to increasing property prices, the general rise in the cost of living and falling conversion rates, which reduce pension income. It’s advisable to approach the topic of affordability in retirement early on as part of a pension analysis or pension planning and to seek advice if needed.
Jonathan B. (28), Wil
What are my chances of being approved for a mortgage if my affordability is low?
If you’re not able to meet the standard affordability requirement of 33%, that doesn’t mean you won’t be able to realise your dream of owning your own home. Many mortgage lenders provide tailored financing solutions for customers who don’t fully fulfil the often-cited general criteria. When calculating affordability, different providers often vary particularly in the level of the imputed interest rate, while some might also make so-called “exceptions to policy” when approving a loan. As a result, many potential homeowners can still fulfil their dream of purchasing a property.
Kevin M. (32), Bülach
What can I do to mitigate low affordability?
To mitigate low mortgage affordability, there are various options for you to consider:
- Additional sources of income: Check whether you can earn additional income, e.g. by increasing your hours at work, taking on a side job or renting out empty rooms.
- Reduce the mortgage sum: If you are able to draw on savings or other sources of capital (e.g. a gift/inheritance), you may be able to increase your deposit or reduce the existing mortgage sum.
- Financing with increased affordability: Small providers with local roots such as regional banks and savings banks are often willing to offer financing with increased affordability following an extensive individual assessment. The mortgage is then regularised over its term through mandatory amortisation and further income growth.
Philip E. (57), Richterswil
Can I still afford my mortgage after retiring?
Whether or not your mortgage is still affordable in retirement depends on your pension income. This pension is generally made up of the OASI pension and occupational pension fund income. Together, this will amount to around 60% of your previous income from employment. Depending on the lender, a drawdown of your assets may also be counted toward your retirement income. As with income from employment, your pension income must be over three times the costs of financing. If this is not the case, the sum of the mortgage must be reduced until the standard affordability rate of 33% is reached. It’s advisable to do this calculation early – at age 50 at the latest – to give yourself enough time to ensure affordability into retirement. The fact is that affordability in retirement is becoming a challenge for more and more homeowners. This is due to increasing property prices, the general rise in the cost of living and falling conversion rates, which reduce pension income. It’s advisable to approach the topic of affordability in retirement early on as part of a pension analysis or pension planning and to seek advice if needed.
Jonathan B. (28), Wil
What are my chances of being approved for a mortgage if my affordability is low?
If you’re not able to meet the standard affordability requirement of 33%, that doesn’t mean you won’t be able to realise your dream of owning your own home. Many mortgage lenders provide tailored financing solutions for customers who don’t fully fulfil the often-cited general criteria. When calculating affordability, different providers often vary particularly in the level of the imputed interest rate, while some might also make so-called “exceptions to policy” when approving a loan. As a result, many potential homeowners can still fulfil their dream of purchasing a property.
Kevin M. (32), Bülach
What can I do to mitigate low affordability?
To mitigate low mortgage affordability, there are various options for you to consider:
- Additional sources of income: Check whether you can earn additional income, e.g. by increasing your hours at work, taking on a side job or renting out empty rooms.
- Reduce the mortgage sum: If you are able to draw on savings or other sources of capital (e.g. a gift/inheritance), you may be able to increase your deposit or reduce the existing mortgage sum.
- Financing with increased affordability: Small providers with local roots such as regional banks and savings banks are often willing to offer financing with increased affordability following an extensive individual assessment. The mortgage is then regularised over its term through mandatory amortisation and further income growth.
