Rising real estate prices mean that long-term mortgage borrowers can no longer meet affordability requirements. Prices have doubled in 25 years, requiring around 20% more income today.

To determine affordability, maintenance and ancillary costs are calculated at around 1% of the property value. If the value of the property increases, the calculated maintenance and ancillary costs also increase accordingly and must be covered by additional income.

Expenses for home ownership should not exceed one-third of income

When concluding a mortgage, the mortgage lender checks the creditworthiness of the mortgage borrower in accordance with the guidelines of the Swiss Bankers Association. One of the most important factors here is affordability. This means that the ongoing expenses for a home should not exceed a certain proportion (percentage) of income – typically around one third. If this is the case, the property is considered affordable.

To calculate the financing costs, the (imputed) mortgage interest, any amortization payments, and maintenance and ancillary costs are added together. Maintenance and ancillary costs are usually set at around 1% of the property value, although this can be reduced to as little as 0.5% for new properties or old buildings that have been renovated to improve their energy efficiency. If real estate prices rise over the years, the imputed ancillary costs used to calculate affordability also increase. In the calculation logic, a doubling of the property's value means a doubling of the imputed ancillary costs, which must be covered by additional income. If the condition of the property deteriorates during the period of ownership, the percentage used for the calculation may increase, further tightening the affordability requirement.

Real estate price increase requires around 20% more income

An evaluation of 500 properties purchased in German-speaking and French-speaking Switzerland in 2000 shows that the average value of the properties has increased from around CHF 730,000 to CHF 1.42 million. The value of a property with 5.5 rooms and 170m2 of living space has thus doubled on average within 25 years. At the same time, equity has almost quadrupled, making many of the buyers at that time "concrete millionaires" today.

The downside: 25 years ago, an income of CHF 130,000 was required to purchase a property worth CHF 730,000. During the same period, nominal incomes in Switzerland rose by an average of around 30% (in the reference example, to around CHF 170,000 before retirement). Anyone who has "only" made the mandatory mortgage repayments to date needs a pension income of CHF 116,000 due to the increase in imputed ancillary costs , which corresponds to 89% of their previous income.

However, with the target replacement rate of at least 60% from AHV and pension funds, pensioners only receive a pension income of around CHF 102,000 (60% of their last income of around CHF 170,000), which often means that affordability is no longer guaranteed due to the increased ancillary costs.

Rigid regulations are becoming increasingly absurd

If the value of the property had not increased over the last 25 years, only CHF 95,000 in income would be required today to service the mortgage due to mandatory amortization, which seems more realistic for many and can be achieved with average wage growth and the target replacement rate. The doubling of the property value therefore means that the income requirement for long-term owners has risen by around 20%, or CHF 21,000 in this example, even though they still live in the same property as 25 years ago.

According to the national consumer price index, the costs of ongoing property maintenance have risen by just under 40% over the same period, while the costs of household goods and housekeeping have actually fallen by just under 4%. "This rigid regulation is becoming increasingly absurd as real estate prices continue to rise and is already causing major problems for every second person who has owned a property in an attractive location for decades and is now approaching retirement," says Lukas Vogt, CEO of MoneyPark.

Due to the increase in property values, affordability requirements are rising much more sharply than actual maintenance and ancillary costs. "In the past, lenders often turned a blind eye, especially if someone had a long-standing relationship with them, and continued the mortgage even with a significantly increased affordability requirement. Recently, however, lenders' appetite for such exceptions has declined," says Lukas Vogt. "Those lenders who continue to do so are charging a premium for the extension – for example, in the form of a 50bps higher interest rate."

"Concrete millionaires" have too little pension income

The concrete gold tied up in real estate does not help long-term owners to meet affordability requirements. It would only help if they decided to sell the property. But the older owners are, the stronger their desire to remain in their own homes beyond retirement. More than three-quarters (79%) of 61- to 65-year-olds admit to this desire in the 2023 Dream Home Study by Helvetia and MoneyPark. Only around 12% are considering selling their home and moving to a smaller property or renting for the last stage of their lives. "Other possible solutions include involving family members, passing on the home to the next generation with the right to live there for the rest of their lives, (preliminary) inheritances, selling other valuables, or considering a real estate pension," advises Lukas Vogt.