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To ensure that homeowners do not get into trouble due to increased interest rates, the following affordability rule has been established in Switzerland: Home ownership costs, i.e. interest and depreciation, must not exceed one-third of household income – at a five per cent notional interest rate.
Thomas SchlittlerBusiness Editor Sunday View
The Swiss National Bank (SNB) turned the screw on interest rates again this week – and not too much: Chairman Thomas Jordan (59) and his colleagues in the Governing Board raised the key interest rate from 0, 5 to 1%. In this way, the monetary watchdogs want to counter inflation.
For homeowners – and for all those who would like to become so – this increase in the benchmark interest rate is not good news: if the general level of interest rates rises, sooner or later home financing will also become more expensive.
A year ago, 10-year fixed rate mortgages were available for an interest rate of just under 1%. Currently, between 2.5 and 3 percent are owed for this. This change is significant: a mortgage of CHF 800,000 taken out at the end of 2021 entails annual interest payable of CHF 8,000. With the same loan amount, annual mortgage interest of between 20,000 and 24,000 francs would fall due today.
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The rule is intended to minimize the possibility of a real estate accident
In order to ensure that homeowners do not get into trouble with such an increase in interest rates, the following rule of convenience has been established in Switzerland: The costs of owner-occupied residential property, i.e. interest and depreciation, must not exceed one-third of the household income – at a notional interest rate of five per cent.
This rule of thumb is intended to prevent homeowners from being unable to meet their bank obligations if interest rates rise sharply and a mortgage renewal is needed. Or to put it another way: This calculation is intended to minimize the likelihood of a real estate accident.
However, the Swiss National Bank’s latest Financial Stability Report 2022 shows that the rule of thumb has been increasingly ignored in recent years. According to the report, released in September, banks no longer even insist on sticking to the traditional affordability calculation for every second new mortgage.
difficult criteria to meet
In 2021, the percentage of borrowers whose mortgage interest and amortization costs exceed one-third of their income at an imputed interest rate of 5 percent was 55 percent. Ten years earlier, banks ignored their one-third rule on only 41% of new mortgages.
The reason is obvious: home ownership prices in Switzerland have doubled in the last 20 years. However, as wages have not risen as much, borrowers are finding it increasingly difficult to meet traditional affordability criteria.
But how is it possible that more and more people get financed for their homes who don’t actually earn enough for it? Have the banks secretly adjusted their accessibility rules?
Don’t just look at income
Major players in the Swiss mortgage market contest this. When asked, Raiffeisen, Credit Suisse (CS), UBS and Zürcher Kantonalbank (ZKB) unanimously pointed out that they had not substantially adjusted their standards for calculating accessibility over the past ten years.
However, the financial institutions admit that “in exceptional cases” they also approve loan applications that do not meet the usual accessibility requirements. However, they don’t want to reveal how often this is the case.
Raiffeisen, CS, UBS and ZKB do not dispute the SNB’s figures, but resist the conclusion that this increases the risk of credit defaults. A UBS spokesman criticizes the fact that this analysis only takes into account the mortgage debtor’s income: “However, other assets may also be included in the calculation.”
Finma doesn’t see it that easy
The ZKB also refers to this point, but also argues that strict compliance with accessibility rules is less important for people with very high wages: “Such mortgage holders are not in financial difficulty even if the housing costs are higher to a third of their increased income,” a spokesperson said. “They still have enough funds to pay for fixed costs.”
The financial market supervisory authority Finma does not see it so easily. In its “Risk Monitor 2022”, published in mid-November, the supervisory authority warns unequivocally: “Affordability risks have increased over the past four years for new mortgages, both for home financing and for of investment properties”. In the course of on-site inspections or investigations of supervised banks, FINMA has ascertained that flexible lending standards are applied in some cases.
For Donato Scognamiglio (52), head of real estate service provider Iazi, data from the National Bank clearly show that the exception to the affordability rule is no longer a rarity. This offers food for thought, especially against the backdrop of rapidly rising key rates. Scognamiglio: “For a long time, the imputed five percent interest rate was considered overly cautious by the industry – and by many borrowers as well. However, the current development of interest rates shows that things can happen quickly and that the established rule of thumb therefore makes perfect sense.”
It is to be hoped that mortgage interest rates will stagnate in the coming months and years and that calculations on the affordability of Swiss banks will be spared a harsh reality check.
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