Mortgage for low income earners

The Swiss National Bank (SNB) turned the interest rate screw again this week – and it’s not too tight: President Thomas Jordan (59) and his colleagues on the Board increased the prime rate from 0.5 percent to 1 percent. In this way, money watchers want to counter inflation.

This rise in the prime rate is not good news for homeowners and homebuyers: If the general level of interest rates rises, housing finance will sooner or later become more expensive.

A year ago, ten-year fixed-rate mortgages could be bought at an interest rate of just under 1 percent. Currently, there is between 2.5 and 3 percent for this. This change is significant: a CHF800,000 mortgage taken at the end of 2021 incurs an annual interest cost of CHF8,000. With the same loan amount, between 20,000 and 24,000 francs per year would be due today.

The rule aims to minimize the chance of a real estate accident.

To ensure that homeowners do not get into trouble as a result of such an increase in interest rates, the following affordability rule has been established in Switzerland: The costs of owner-occupied residential property, ie interest and depreciation, must not exceed one-third. family income – at an imputed interest rate of five percent.

This rule of thumb aims to prevent homeowners from being unable to meet their bank obligations if interest rates suddenly rise and it’s time to renew their mortgage. Or to put it another way: This calculation aims to minimize the chances of a real estate accident.

However, the Swiss National Bank’s latest Financial Stability Report 2022 shows that the one-third rule has been increasingly overlooked in recent years. According to the report released in September, banks no longer insist on sticking to the traditional affordability calculation for every second new mortgage.

difficult criteria to meet

In 2021, 55 percent of borrowers whose interest and amortization costs on mortgages exceeded one-third of their income at the 5 percent benchmark interest rate. A decade ago, banks ignored the one-third rule on only 41 percent of new mortgages.

The reason is clear: home ownership prices in Switzerland have doubled in the last 20 years. However, as wages are not as high as they used to be, borrowers are finding it increasingly difficult to meet traditional affordability criteria.

But how is it possible for more people who don’t actually earn enough to get financing for their own home? Have banks secretly adjusted their affordability rules?

Don’t just think about income

The main players in the Swiss mortgage market object to this. Raiffeisen, Credit Suisse (CS), UBS and Zürcher Kantonalbank (ZKB) unanimously stressed that they have not fundamentally changed their affordability calculation standards over the past ten years.

However, financial institutions acknowledge that they also approve loan requests that do not meet the usual affordability requirements in “exceptional circumstances”. However, they don’t want to explain how often this happens.

Raiffeisen, CS, UBS and ZKB do not dispute the Central Bank’s figures, but resist the conclusion that this increases credit default risk. A UBS spokesperson criticizes that this analysis only considers the mortgage borrower’s income: “But other assets can also be included in the calculation.”

Finma doesn’t see it that easily

ZKB makes this point as well, but also argues that it’s less important to strictly adhere to affordability rules for those with very high salaries: Increase in income,” said a spokesperson. “They still have enough funds to pay their fixed costs.”

Financial market supervisory agency Finma doesn’t see this so easily. In its “Risk Monitor 2022”, published in mid-November, the supervisory authority warns clearly: “Affordability risks have increased for new mortgages for both residential and investment properties over the past four years.” During on-site inspections or investigations of audited banks, FINMA has observed that lax lending criteria are applied in some cases.

For Donato Scognamiglio, 52, head of real estate service provider Iazi, figures from the Central Bank clearly show that the exception to the affordability rule is no longer uncommon. This is worth considering, especially against the background of rapidly rising prime interest rates. Scognamiglio: “For a long time, the default interest rate of five percent was seen as over-cautious by the industry, as well as by many borrowers. However, current interest rate development shows that anything can happen quickly and so the established rule of thumb makes a lot of sense. ”

It is hoped that mortgage interest rates will remain stable in the coming months and years, and that Swiss banks’ affordability calculations will escape a harsh reality check.