A real estate purchase in Switzerland deserves a careful reflection because it is characterized by all kinds of uncertainties. Presentation of the main factors making it possible to compare the purchase and the rent.
The lower the rates, the lower the debt burden. Currently, with Libor mortgages, a rate of less than 0.7% is possible – but this rate varies regularly with the Libor rate of the money market. One must be cautious: with a low interest rate, the debtor is exposed to the risk of a change in the rate. When rates rise in the money market, the burden of the mortgage increases.
Real estate prices
The higher the price, the less a purchase is justified. However, it is precisely the constant price growth in recent years that has led purchasers to believe that real estate was a safe investment. This masks a big risk: a recession, a construction boom with an oversupply of real estate or a collapse in immigration figures are likely to put prices under pressure. Remember: in Zurich, in the 1990s, real estate lost more than 30% of its value. Such a setback becomes particularly painful for homeowners when their equity is under the leverage of mortgages. If, for example, the purchase price is 70% financed by a mortgage, with a 30% decline in prices (as in the 1990s), equity would be fully depleted.
The bank makes a standard calculation of the credit that can be granted: even though the annual costs of mortgage interest, amortization and maintenance are less than one-third of gross income, the bank does not apply, in its solvency exam, the actual mortgage rates, but what is called the theoretical rate which is between 4.5 and 5%: a kind of stress test for real estate owners.
According to the Swiss National Bank, over 40% of new mortgages granted to individuals do not meet this condition. The calculation is criticized, since the rates are currently very far from this 5%. Still, if the income drops after the purchase, it may be that the mortgage is difficult to assume. The problem becomes acute if an old mortgage has to be redeemed: then the bank may require additional depreciation.
The larger the capital, the lower the mortgage debt and the less the concern about the effect of rising rates or falling property prices. But as real estate prices are currently so high, many buyers intend to borrow as much capital as possible. The upper limit of a loan is set at 80%, which means that, for a purchase price of one million, at least 200,000 francs of equity must be provided.
The higher the rents, the more it is worth buying. If mortgage rates rise, rents also tend to rise because of the rise in the reference rate. But the same factors that put real estate prices under pressure also lower rents: recession, lower or over-supply. A purchase decision could then prove doubly false: on the one hand, the homeowner does not benefit from lower rents, on the other hand, he must digest a reduction in the value of his property.