How do Swiss banks calculate the affordability of a mortgage?

The 3-point orientation

Swiss banks calculate the affordability of a mortgage by comparing imputed housing costs with income. In return, they usually expect an imputed interest rate of around 5%, around 1% maintenance and service charges of the property value, and the necessary repayment of the second mortgage. The total annual housing costs should generally not exceed 33% of gross income.

The principle: affordability protects against overfinancing

Affordability shows whether a household can afford the property in the long term. It is not just a question of whether current mortgage interest rates are affordable. Banks want to know whether the financing is still working even if interest rates rise, income falls, or if additional costs arise.

That is why Swiss banks calculate conservatively. You are not simply using the current interest rate of a fixed-rate mortgage or SARON mortgage, but a higher imputed interest rate. This stress test is intended to prevent buyers from coming under financial pressure in the event of a turnaround in interest rates.

In addition to repayment, affordability is the second central hurdle in real estate financing. loan-to-value ratio mean: What percentage of the property value is financed by external financing? affordability means: Can the budget bear the annual costs of this financing on a permanent basis? A mortgage is only realistic if both conditions are met.

The most important formula: housing costs in relation to income

The basic formula is simple: The bank calculates the annual imputed housing costs and compares them with gross income. Housing costs include imputed interest, maintenance and service charges as well as amortization. It is then checked whether these costs exceed a certain load limit.

The rule of thumb is: Total housing costs should generally not exceed around one third of gross annual income. Many banks calculate 33%, some 35% or slightly differently depending on the customer situation. Baloise, for example, cites a maximum of 35% of income as a guideline, while UBS uses its computer to show 33% of gross annual income. (baloise.ch)

According to the 33% rule of thumb, a household with a gross annual income of CHF 150,000 should therefore bear a maximum of around CHF 49,500 annual housing costs. If the imputed costs are higher, the mortgage is considered unsustainable from the point of view of many banks.

Step 1: Imputed interest rate instead of current mortgage interest

The most important difference between reality and bank account is the imputed interest rate. Even though a fixed-rate mortgage can currently be significantly cheaper, banks often expect around 5% of the entire mortgage. Moneyland notes that most banks and insurers currently use an imputed mortgage interest rate of 5%; some are more optimistic about 4.5%. (moneyland.ch)

The reason is safety. A mortgage often runs for decades. Even if interest rates are low today, they may rise later. The bank therefore wants to know whether the budget remains solvent even in a higher interest rate environment. This not only protects the bank, but also buyers from financing that is too risky.

Example: With a mortgage of CHF 800,000, the bank calculates annual interest costs of CHF 40,000 at 5% imputed interest. Even if the effective interest rate is currently only 2% and costs only CHF 16,000 in real terms, the higher imputed amount often counts for affordability.

Step 2: Include maintenance and service charges

In addition to interest rates, banks expect maintenance and service charges. A lump sum of around 1% of the property value per year is often used for this purpose. This item is intended to reflect running costs such as maintenance, insurance, minor repairs, provisions, heating, fees and other owner costs.

With a property value of CHF 1,000,000, 1% corresponds to around CHF 10,000 per year or around CHF 833 per month. This amount is not always paid exactly every year, but it is realistic in the long term. A new house may initially require less maintenance; an older house can cost significantly more.

Some banks or cantonal banks use slightly different assumptions. The Schwyzer Kantonalbank, for example, cites an imputed interest rate of 5%, but takes into account a flat rate of 0.7% of the property value for maintenance and service charges. (szkb.ch) This shows that the logic is similar across Switzerland; the specific parameters can vary depending on the provider.

Step 3: Consider the repayment of the second mortgage

Amortization is the third component of the affordability calculation. In Switzerland, banks usually finance residential property up to a maximum of 80% of the property value. The portion up to around two thirds is considered the first mortgage. The range above this up to 80% is often referred to as a second mortgage.

This second mortgage usually has to be repaid. It often has to be returned within 15 years or by retirement at the latest. The amortization is therefore part of the annual housing costs and reduces financial leeway.

Example: A house costs CHF 1,000,000. The mortgage amounts to CHF 800,000. The first mortgage covers around CHF 666,000, the second mortgage amounts to around CHF 134,000. If this amount has to be amortized over 15 years, this results in an additional burden of around CHF 8,933 per year. This amortization is included in affordability.

Example calculation: House for CHF 1,000,000

A household wants to buy a house for CHF 1,000,000. He contributes CHF 200,000 in equity and requires a mortgage of CHF 800,000. The bank now calculates the affordability.

With an imputed interest rate of 5%, this results in interest costs of CHF 40,000 per year. For maintenance and service charges, the bank expects 1% of the property value, i.e. CHF 10,000 per year. In addition, the second mortgage of around CHF 134,000 must be repaid over 15 years, resulting in around CHF 8,933 per year.

The total imputed housing costs therefore amount to around CHF 58,933 per year. If these costs may account for a maximum of 33% of gross income, the household requires a gross annual income of around CHF 178,600. This example calculation shows why affordability is often stricter than buyers initially expect.

Why current interest rates aren't enough

Many buyers are wondering why banks expect 5% when effective mortgage interest rates are significantly lower. The answer lies in long-term risk. A mortgage is not a short-term consumer expense, but a long-term commitment. Interest rates can rise, life situations can change, and real estate causes running costs.

The imputed interest rate is therefore a type of security check. It prevents a household from being able to buy a property just because interest rates are low at the moment. If financing only works when interest rates are low, it is too risky from the bank's point of view.

For buyers, this conservative calculation is sometimes frustrating but makes sense. It shows whether owning a home remains financially viable even in difficult times. Anyone who narrowly fails with their bank statement should check the purchase price, equity, income or choice of property again.

Which income counts?

Not every income counts the same when it comes to the sustainability check. Banks generally take stable, regular and verifiable income into account. This includes wages, self-employment income, pensions, recurring maintenance payments or other reliable sources of income.

Variable components such as bonuses, commissions, overtime, expenses, sideline or fixed-term income are often only partially or not taken into account at all. UBS points out that credit institutions calculate their affordability differently and that some bonuses do not count completely or not at all as part of their income. (ubs.com)

In the case of couples, banks also check whether both incomes are realistic in the long term. If family planning, part-time work, self-employment or retirement are foreseeable, the bank can calculate more cautiously. It is not the maximum possible income that is decisive, but the sustainable disposable income.

affordability upon retirement

Affordability often changes significantly with retirement. Earned income falls while the mortgage persists. Banks are therefore examining, particularly with older buyers or existing owners, whether the financing remains sustainable even after retirement.

Raiffeisen sets a sustainability limit of 38% of disposable income for the AHV age, although a long-term interest rate of 5% and 1% maintenance costs are still expected. In addition, the second mortgage must always be repaid by retirement. (raiffeisen.ch)

For owners, this means that anyone who extends a mortgage or buys a house shortly before retirement should check early on whether their pension, pension fund, AHV, assets and amortization plan fit together. A mortgage that is sustainable today can become problematic after retirement.

Impact of equity on affordability

More equity improves affordability because the mortgage is getting smaller. A smaller mortgage means lower imputed interest costs and often less amortization. Anyone who contributes more than the minimum 20% of equity can significantly ease the affordability calculation.

Example: With a purchase price of CHF 1,000,000, it makes a big difference whether the mortgage is CHF 800,000 or just CHF 650,000. With 5% imputed interest, interest costs fall from CHF 40,000 to CHF 32,500 per year. In addition, the second mortgage may be smaller or not necessary at all.

Nevertheless, you shouldn't invest all your assets in the house. A reserve for maintenance, renovations, taxes, relocation, interest rises and life events remains important. Good financing combines sufficient equity with liquidity and affordability.

affordability for older houses and renovations

With older homes, the bank may take extra care. If there is a need for renovation, higher maintenance costs, investments or energy measures may be necessary. While these costs do not always directly influence the standard affordability formula, they do have an impact on the overall assessment.

A house with old heating, poor insulation, a roof in need of renovation or outdated electrical equipment can result in high additional costs after purchase. The bank can therefore require renovation budgets, cost estimates or own funds reserves.

This is important for buyers. A property can look sustainable on paper, but in reality become too expensive when major renovations are pending. The affordability calculation should therefore always be supplemented with maintenance and renovation planning.

Differences between banks

Although the basic logic is similar, banks differ in details. Some expect a 33% load limit, others 35%. Some set 1% for service charges, others 0.7% or differentiate by object. Some banks take variable incomes into account more generously, others are more conservative.

The models also differ for self-employed people, entrepreneurs, cross-border commuters, bonus payments, assets, retirement or high own funds. It can therefore be useful to obtain several financing offers. A rejection by a bank does not automatically mean that no bank would finance.

Nevertheless, scarce affordability should not be overestimated. If financing only works with very optimistic assumptions, the risk remains with the buyer. The best bank is not always the one that finances the most, but the one whose model fits your own situation in the long term.

How buyers can improve their affordability

There are several ways to improve mortgage affordability. The simplest is more equity. As a result, mortgage, interest and amortization fall. A lower purchase price or another choice of property can also ease the bill.

A second option is higher or more stable income. In the case of couples, the bank can take both incomes into account, provided that they are realistic in the long term. Clean financial statements, stable income and transparent documents help self-employed people.

A third option is to reduce other obligations. Leasing, consumer loans, maintenance payments or high fixed costs can restrict financial leeway. Longer preparation with a higher savings rate, pillar 3a, pension fund planning and debt reduction can also improve financing opportunities.

Common mistakes when calculating affordability calculation

A common mistake is to only calculate the current effective mortgage interest rates. This results in an overly optimistic picture. For the bank, the imputed interest rate of around 5% usually counts, not the current promotional interest rate.

A second mistake is forgetting maintenance and service charges. A house doesn't just cost interest and amortization. Repairs, insurance, energy, provisions, gardening, community fees and renovations are part of the reality of ownership.

A third mistake is overestimation of income. Bonuses, variable salary components or fixed-term income are not always fully accepted by banks. If you want to check your sustainability, you should calculate conservatively and not plan for the best year.

Practical recommendation: Calculate backwards before buying

If you want to buy a house, you should first calculate the maximum sustainable housing cost burden. With a gross income of CHF 160,000, a third is around CHF 53,300 per year. From this, it is possible to determine approximately how high the mortgage, purchase price and amortization may be.

You should then calculate various scenarios: purchase price, equity, mortgage, 5% interest rate, 1% service charges, amortization, effective interest rate and liquidity reserve. Only when the conservative calculation works can the property be financed in the long term.

It is also worth talking to several banks or mortgage experts. In this way, you can see how different the models are and which financing is realistic. The affordability should not only be checked after the viewing, but before you seriously make a purchase offer.

Conclusion: affordability is the stress test for buying a house

The answer to the question How do Swiss banks calculate the affordability of a mortgage? means: You calculate the annual housing costs from imputed interest, maintenance, service charges and amortization and compare them with income. As a rule, these costs should not exceed around one third of gross income.

The most important difference to everyday accounts is the imputed interest rate. Banks usually expect around 5%, even though effective mortgage interest rates are lower. In addition, maintenance and service charges are often estimated at around 1% of the property value, and the second mortgage must be repaid.

For buyers, this means that a mortgage must not only be affordable today, but also in the long term. Anyone who realistically takes equity, income, amortization, maintenance and interest risk into account makes a much more secure purchase decision.

mortgage affordability glossary

affordability: ratio of imputed housing costs to income. It shows whether a mortgage can be financed in the long term.

Imputed interest rate: Notional interest rate, usually around 5%, with which banks check their long-term resilience.

loan-to-value ratio: Proportion of real estate value financed by a mortgage.

Amortization: Repayment of part of the mortgage, particularly the second mortgage.

Second mortgage: part of the mortgage above around two thirds of the property value, which must generally be repaid within 15 years or until retirement.