My home: what can I afford?
To finance a house or an apartment, you need enough equity. But another determining factor is how you can manage the costs involved. In addition to mortgage interest, the amortization of the loan and maintenance and incidental costs must be paid.
To ensure that you can handle these costs, a so-called affordability index is calculated. This index is used to designate the ratio of the expected costs compared to the net income of the prospective homeowner. The rule of thumb is that for sound financing, the expected costs should not total more than one third of your net income.
The affordability of your real estate financing
An affordability calculation is comprised as follows:
- Interest is applied to the total amount of financing at an assumed annual rate of 4.5 percent. This ensures that the financing is also assured if interest rates increase.
- Added to this are the targeted amortization of the mortgage loan. For interest reasons, it is to your own best advantage to reduce the incurred debt. As a guideline, the mortgage should be amortized within 15 years to roughly two thirds of the loan amount.
- A further 1 percent of the value of the property is calculated for maintenance and incidental costs, such as renovations and remodeling of the property, as well as replacement of equipment and appliances. In addition to interest, amortization, and incidental costs, liabilities to third parties (leases, consumer loans, credit card balances, personal loans, vacation/second homes) are considered as expenses.
In a period of low interest rates - such as is currently the case - the effective costs of the property are of course lower than calculated. Nevertheless, the deciding factor for granting a mortgage loan is the affordability index calculated using the assumed interest rate of 4.5 percent.
Security-oriented evaluation of income
The total property costs calculated in this way must not be more than one third of the net income of the homeowner. A 13th monthly salary and other sustainable salary components are included in this amount. Dual wage earners can usually combine their two incomes if they enter into a joint and several debt. This means that both partners are jointly liable for the expected costs.
You should note, however, that most banks tend to evaluate your income situation more conservatively with emphasis on their security. Unusual salary components, such as bonuses or premiums that you receive from your employer without a long-term guarantee, are generally not included.
A concrete example of an affordability index calculation:
|Purchase price ||CHF 800,000 |
|Mortgage: 80% of the purchase price ||CHF 640,000 |
| || |
|Income ||Calculated property costs |
|Net salary Husband ||CHF 103,000||Interest costs ||4,5% of the mortgage||CHF 28,000|
|Net salary Wife (part-time)||CHF 52,000||Amortization||1% of the borrowed capital requirement||CHF 6,400|
|Total income||CHF 155,000||Incidental an maintenance costs||1% of the price of the property||CHF 8,000|
|Total calculated property costs||CHF 43,200|
Ratio of property costs compared to income
A professional advisor is a valuable help in calculating your financial burden and in avoiding bottlenecks and gaps. In this way, you can identify possible difficulties early and receive all the support you need to realize your home purchase.