What could be better than putting rented housing behind you and moving into your own four walls? Have you caught the home ownership bug too? As well as hunting for the perfect property, you should also give some thought to the question of how to finance your dream home. How much equity do you need? Can you use your pension assets? And what insurance should you take out?
Daniel Hajdinyak is a pensions expert at AXA and has drawn up a list of ten important tips for home buyers.
Housing costs should not amount to more than a third of your gross income. This includes not only mortgage interest, but also repayments and maintenance costs. Important: In the current low interest rate environment, a longer average interest rate of 5% is used to calculate the maximum mortgage loan.
At least 20% of the value of the property must be financed from equity, a minimum of 10% of which must be “genuinely” self-funded, i.e. not from Pillar 2 pension assets. The remaining 80% of the purchase price can be financed with a mortgage.
The following general rule applies: The higher the equity ratio, the lower the interest burden and the more affordable the purchase will be. However, you should never tie up all your liquidity in home ownership, as this would leave you with nothing to fall back on in an emergency. It’s wise to be prudent in your calculations: You can always invest more of your own cash in your home at a later date.
People often underestimate maintenance costs. Banks put these costs at between 0.7 and 1% of the total property value. This is included in the bank’s affordability check, along with the 5% imputed mortgage interest and repayments. These estimates may seem high, but when you consider the cumulative cost of energy, fees, building insurance premiums, maintenance work, provisions for renovations and replacement equipment, they are realistic. For older properties, you should allow for even higher maintenance costs.
It is possible to have savings held in your pension fund paid out to help finance the purchase of a home of your own. This reduces the amount you have to pay in mortgage interest and repayments as it means you don’t need to have such a large mortgage. However, withdrawing pension fund savings in advance in this way will lead to a reduction in your retirement pension and, depending on the pension fund, may also lead to reductions in benefits in the event of disability or death.
If you pledge your pension fund savings they are used as additional collateral for your mortgage lender and in return you are granted a larger mortgage loan. The capital stays in the pension fund where it continues to earn interest and there is no reduction in benefits. The disadvantage of this is that you have higher interest and repayment costs as less equity is used to reduce the size of your mortgage.
A second mortgage must generally be repaid within 15 years, or at the latest by the time you reach retirement age. It can be repaid in two ways: If you opt for direct repayment, you repay an agreed amount each year. This reduces your mortgage debt and interest expenses, but increases your tax burden.
If you opt for indirect repayment, money is invested in a pension plan in order to accumulate the necessary capital. This insurance policy with an investment component is pledged to the mortgage lender. When the policy matures, the payout is used to repay your second mortgage. Your mortgage debt, interest expense, and tax liability remain the same. At the same time, the integrated insurance cover ensures that payments can be kept up in the event of disability or death.
If you can answer “yes” to all of these questions, you should opt for indirect repayment; if your answer to all three questions is “no”, you should choose direct repayment.
In principle, your second mortgage must be repaid by the time you retire. This takes account of your lower income after retirement. In individual cases, the loss of income after retirement may nevertheless have a drastic impact on affordability. If the cost of home ownership becomes unaffordable after you retire, there are three options:
Which solution you should choose can only be decided shortly before retirement. However, the capital for this must be saved early on. Pillar 3a life insurance policies are a good savings option for homeowners.
A builder’s risk insurance policy covers damage to your building, such as collapsing ceilings or toppling walls. A builder’s liability insurance policy also covers financial claims for bodily injury and property damage filed against the builder or the owner of the building plot on the basis of statutory liability provisions. And with legal protection insurance for builder-owners, private builder-owners are insured against, for example, disputes relating to hidden defects in the building.
In most cantons it is compulsory for buildings to be insured against fire damage. Anyone building in the cantons of Geneva, Valais, Uri, Schwyz, Appenzell Innerrhoden, Obwalden, and Ticino should take out fire insurance for their property. Other risks not covered include water damage such as frozen water pipes, backwater from the sewage system, and liquids from heating, air conditioning, and refrigeration equipment. For claims of this nature, you should take out water insurance.