Affordability

Your affordability (or housing expense-to-income ratio) is used to compare your income against your liabilities. Liabilities versus income may be measured over the space of one month, or over one year.

The primary liabilities taken into account by lenders when considering your mortgage in Switzerland include
1) mortgage interest rates based on an imputed mortgage rate (typically 5%),
2) recurring expenses and
3) amortization payments.

Your ability to repay a loan, taking into account all associated costs, is typically shown as a percentage in what’s know as your affordability or expense-to-income ratio.

The basic rule here is: The higher your expenses are in relation to your income, the higher your expense-to-income ratio will be and the less likely you are to be accepted for a home loan.

As of 2014, Swiss banking guidelines require that expense-to-income ratios for borrowers applying to mortgage a home «show a sustainable rate of income in proportion to expenses». When interest rates are low, loan repayment viability checks must take possible interest rate hikes into account.

Additionally, if changes occur that could affect your creditworthiness, your expense-to-income ratios will have to be recalculated to account for these changes. If necessary, your mortgage holder may take necessary steps to insure that the debt is paid. Things that could affect your ability to repay a mortgage may include starting a family or getting a different job.

Expense-to-income ratios serve as an important criteria for lenders when considering your mortgage. The exact calculation of your affordability varies between lenders. Even maximum expense ratios aren’t set in stone, but the majority of lenders limit this to 33% for mortgages on properties for personal use.

In other words: To be eligible for a home loan in Switzerland, total annual expenses associated with the mortgage shouldn’t come to more than one-third of your income. Whether the affordability calculation is based on your gross or net income will depend on the home loan provider.

Each lender also decides if and how your savings, pensions and additional income will be included as income when calculating your affordability. According to guidelines, a second income (from your spouse or flatmate, for example) should only be added to the equation if your home is mortgaged in exchange for a joint home loan.

The affordability calculator by moneyland.ch lets you quickly and easily calculate the costs and affordability of a mortgage.

Affordability: example

The purchase price and market value of a home total 600,000 francs. The buyer is able to put down 120,000 francs as a down payment. The bank provides a home loan of 480,000 francs for your mortgage. Within 15 a 15 year tenure, the mortgage must be amortized to the tune of 400,000 francs, or 2/3 of the home’s purchase price.

The amortization of the remaining 80,000 francs (480,000 francs - 400,000 francs) is known as the second mortgage. The 15 identical amortization payments on this second mortgage are paid at the end of each year. The bank uses an imputed interest rate of 5% (as with the first mortgage) to calculate mortgage rates.

Finally, the bank accounts for additional costs, to the tune of 1% of the purchase price annually. So estimated mortgage-related expenses for the first year would add up as follows:
Interest on your home loan: 480,000 francs * 5% = 24,000 francs
Additional costs: 600,000 francs * 1% = 6000 francs
Amortization: 80,000 francs / 15 = 5334 francs
Total mortgage-related expenses in first year: 35,334 francs

If annual income averaged 110,000 francs, the expense-to-income ratio (affordability) would be 35,334 francs / 110,000 francs = 32%. Verdict: This mortgage would probably be viable.

If annual income were lower, for example 60,000 francs, the expense-to-income ratio would be 35,334 francs / 60,000 francs = 59%. In this case, the expense-to-income ratio (affordability) would be too high, and the mortgage would not be considered viable.

More information:
Leading Swiss affordability calculator
Mortgages in Switzerland compared
First mortgage - simply explained
Amortization - simply explained
What is a loan-to-value ratio?
What is a second mortgage?

Expert Felix Oeschger
Felix Oeschger is an analyst and expert at moneyland.ch. He is responsible for several core topics.
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