Mortgages in Retirement: The Forced Sale Nightmare

Many homeowners consider their privately owned home to be an important retirement asset, and this usually makes sense. Your own home can potentially be a profitable capital investment, and owning your own home can also help you save on taxes compared to renting.

But relying on a lender to finance your home doesn’t come without a catch or two. This has become obvious in recent years among borrowers who are already retired, or expect to retire shortly. Elderly homeowners paying off a mortgage or looking for mortgage extensions may find that Swiss Banks are tightening the screws.

The Swiss National Bank and FINMA have long warned of a potential housing and mortgage bubble. As a countermeasure, Swiss banks have already implemented a number of safety controls in their mortgage granting process. These include new homeowner equity requirements, new amortization rules, and strict adherence to lowest valuation principles. The Bundesrat (federal council) hasn’t shut the door on further restrictions, if those implemented so far don’t do the trick.

Mortgages for seniors: Tougher affordability checks

As well as raising the bar on mortgage application requirements, Swiss banks have also become more rigid in their ongoing mortgage affordability inspections. The rule of thumb here, sometimes called the golden rule of home finance, is this: Mortgage rates plus additional charges shouldn’t amount to more than one-third of the borrowers income.

When calculating your mortgage payments in relations to your income, banks use a hypothetical flat rate (normally 5 percent) rather than actual mortgage rates. An additional 1 percent is added to the calculation to account for additional charges.

Example: If a property costs 1 million francs and 600,000 francs of that will be covered by a mortgage, you will need to have an income of 120,000 francs per year to cover the 5 percent mortgage rates (30,000 francs per annum in this case) and the 1 percent additional costs (10,000 francs per annum in this case).

The crux of the matter: The income of a Swiss pensioner, including AHV payments and retirement fund payments is, on average, at least a third lower than pre-retirement household income. For this reason, a fair amount of pensioners aren’t able to meet the affordability requirements explained in the formula above. If a property’s value goes up, the additional charges may exceed 1 percent, making the criteria even more difficult to meet.

Owning your own home after retirement: An impossible dream?

In the worst case scenario, the bank may demand that you sell your home if you no longer meet affordability requirements. Understandably, the victims of this tragedy are usually shocked to find themselves forced out of their home after regularly paying down the amortization charges and mortgage rates in hopes of a peaceful retirement.

Swiss banks aren’t normally bendable where affordability requirements are concerned - regardless of a pensioners actual living costs and total savings. Even if a borrower can prove that they would be able to keep up with mortgage rates as high as 5%, they may find themselves falling short of affordability criteria at some banks.

Alternatives to buying a home

If selling out isn’t an option for you, you’ll be glad to know that a number of banks do offer alternatives to a home sale. These include sharing ownership with other family members, or pledging part of your savings towards paying for your mortgage. Committing savings to a mortgage involves transferring the money or securities in question to your mortgage-servicing bank, a move that is normally in the bank’s best interest. If you are lucky enough to have children who are willing to buy your home and then rent it back to you, that could be a preferable alternative to selling you home.

Mortgages for seniors: Reverse mortgages

Another way to avoid selling your home, while extending or augmenting your mortgage, is by getting a reverse mortgage. Also known as senior mortgages or property-based retirement benefits, these financial products are offered almost exclusively to the elderly. The interest payments for the mortgage are covered with a payment by the lender into a blocked account. The rest of the mortgage is then paid out to you as tax-free retirement benefits.

Example: Let’s say you were to get a reverse mortgage worth 500,000 francs at a rate of 2,5 percent with a 15 year mortgage term. Out of that, 187,500 francs would go to cover your interest payments. The remaining 312,500 francs are yours to use, and can supplement your retirement income substantially. Because you are consuming your own capital (in the form of your home), the income you receive from a reverse mortgage is tax-free.

Only a handful of Swiss banks offer reverse mortgages, including Bank Zimmerberg (the Pauschalhypothek offer), the Bezirks-Sparkasse Dielsdorf (the Seniorenhypothek offer), Bank Sparhafen Zürich (the Finanzierung 50+ offer), and the Vermögenszentrum (the Immo-Rente offer).

As well as being at least 65 year old, you will have to meet additional criteria which usually include a minimum property value (1 million francs for example) and at least 70% equity in your home. You can mortgage up to 65% of your home based on its market value. Typically the reverse mortgages offered have fixed rates and a long mortgage term of 10 years or more.

Important: If you want to leave your home to children or other beneficiaries, or hope to sell your home in the future, getting a reverse mortgage is not a good idea.

Our advice: Plan ahead

The best way to avoid having to grasp at straws in your golden years is to get a clear overview of your mortgage situation, both present and future. Although you might not feel old at 45, it’s the perfect age to review your future mortgage situation. If you come to the conclusion that your financial situation after retirement will leave you lacking when those mortgage affordability checks come around, you will still have enough time to adjust your budget to prepare for the future. Paying more into your pillar 3 retirement account or maximizing your pension fund contributions are two possible solutions to bring your retirement income up to scratch.

More information:
Mortgages: comparison tool
Family mortgages
Online mortgages
Mortgages: What does it cost to exit early?