What happens to affordability upon retirement?

The retirement dilemma

When retiring, income in Switzerland falls by an average of 30 to 40 percent, as AHV and pension fund pensions are lower than the usual gross wage. Since banks continue to calculate the imputed security interest rate of 5% for the affordability calculation, this lower income means that many retirees no longer meet the 33 percent affordability rule. In such a case, the bank requires a partial repayment (amortization) of the mortgage before or at the latest upon retirement in order to adjust the loan volume to the new retirement income.

Why banks take a closer look as they age

Many homeowners argue with their bank that they can easily finance real interest rates (which are often 1.5 to 2.5 percent for fixed-by mortgages) even with the smaller pension. However, Swiss credit law leaves banks no room for manoeuvre here. The principle of “imputed affordability” applies in old age as well as to a new 30-year-old buyer.

As soon as the borrower reaches 55 or 60 years of age, banks request the latest pension forecasts from the AHV (statement of expected retirement pension) and the pension fund (pension certificate) as part of a forward-looking audit. The bank then draws up a affordability calculation: It takes the imputed costs (5% interest on the remaining mortgage plus 1% service charges for maintenance) and compares them with future pension income. If these costs exceed a third of the pension amount, the mortgage is no longer sustainable on paper — even if the customer has never missed a payment in their life.

A specific calculation example for retirement

The following practical example for a married couple shortly before retirement shows how the fall in income has a concrete effect on the calculation.

• Starting position before retirement
• Existing mortgage: 500,000 CHF
• Value of the house: 800,000 CHF
• Gross salary before retirement: 130,000 CHF/year
• Imputed costs (5% interest + 1% service charges): 25,000 CHF + 8,000 CHF = 33,000 CHF
• affordability before retirement: 33,000 CHF/130,000 CHF x 100 = 25.4% (affordability is absolutely green).
• Situation after retirement
• The joint income from AHV and pension fund falls to: 80,000 CHF/year
• The imputed costs remain unchanged at: 33,000 CHF
• affordability after retirement: 33,000 CHF/80,000 CHF x 100 = 41.2%

In this scenario, the couple clearly breaks the critical hurdle of 33 percent. The mortgage is no longer formally sustainable for the bank.

What are the consequences of a lack of affordability?

If, as part of the audit, the bank finds that affordability is breached in old age, the mortgage does not expire immediately, but the institution takes action to minimise its risk. The following measures are used in practice:

• The obligation to make extraordinary amortization: This is the most common consequence. The bank asks owners to reduce (repay) the mortgage amount until the imputed costs fit back into the third of the new pension. In the example above, the couple would have to reduce their mortgage by around 100,000 to 150,000 francs.
• No increase or extension: If a fixed-rate mortgage expires shortly after retirement, the bank may refuse to renew the loan on the same terms or extend a tranche as long as no additional capital is injected.
• The forced sale of a house: In the worst case scenario — when there is no cash, no pillar 3a balance or no savings to pay the required amortization — seniors often have no choice but to sell their beloved home and move into a rented apartment.

Strategies: How to close the sustainability gap in time

The “retirement dilemma” can almost always be averted through early planning and strategic action between the ages of 50 and 60.

• Voluntary amortization in the years before retirement: Instead of leaving savings in an interest-free savings account, it can make a great deal of sense to gradually reduce the mortgage during the purchase phase (possibly indirectly via Pillar 3a). The smaller the remaining debt is upon retirement, the lower the imputed interest in old age.
• Carefully weigh up lump-sum withdrawal versus pension: Anyone who is faced with the decision to withdraw the money from the pension fund as a lifetime pension or as a one-time capital must examine the effects on the mortgage. A lump-sum withdrawal reduces the fixed monthly pension income, which worsens the bank's affordability calculation. In return, the capital is directly available to reduce the mortgage.
• Purchasing into the pension fund: Targeted purchases into the second pillar in the last few years before retirement not only make massive tax money saved, but also targeted improvements to future retirement pensions, which improves affordability.
• The “reverse mortgage” (real estate pension) model: Some Swiss banks offer special products for wealthy but low-income seniors. Despite a low pension, the mortgage is topped up and interest is added directly to the loan or paid from a blocked deposit. However, the hurdles for such products are very high.

Conclusion: Retirement requires a timely financial check

In the Swiss system, the affordability of a mortgage is not a static construct, but a dynamic process that changes radically when regular earned income disappears.

In summary, it can be stated that anyone who wants to enjoy home ownership carefree in old age should make a detailed description of their future income and expenditure no later than their 55th birthday. Don't rely on the bank to “turn a blind eye” to long-time customers. Only those who recognize the imputed gap between salary and pension at an early stage have enough time to ensure that their own four walls remain financially sustainable and secure even after they have earned retirement.

Retirement planning glossary

• Extraordinary amortization: A voluntary repayment of mortgage debt or required by the bank due to a change in credit rating (e.g. retirement) outside the regular installment obligation.
• Indirect amortization: The mortgage is not repaid directly to the bank, but via payments to a pledged Pillar 3a account. The money is only used to repay the mortgage when you retire (or liquidate), which offers tax advantages.
• pension certificate: A document issued annually by the pension fund, which shows the current status of savings and the expected pension benefits when the normal retirement age is reached.