A mortgage in old age: Live and feel light in your own home, even after retirement

Sweet freedom is almost yours! The chance to say goodbye to the daily grind and welcome in a world of leisure and adventure. All the same, while your schedule may have more wiggle room, your wallet might feel a bit lighter. That’s where we come in. With a little forethought and planning, you, too, can ensure the transition from wage-earner to pensioner is seamless. So sit back, relax, and let’s get ready to make the most of your golden years!

And here is where the young and savvy homeowners should listen up! The key to a stress-free retirement is starting early and ensuring your biggest investment - your home – remains financially feasible. Here’s a little rule of thumb to keep in mind. Housing expenses, including maintenance, utilities, and mortgage payments, should not exceed a third of your retirement income. And don’t let the banks fool you, even if you’re in the prime of your life, it’s never too early to check if you’ll be in a position to keep up mortgage payments comfortably down the line. So, take the reins of your financial future and get on the winning side of retirement!

Calculating affordability – that’s all you need to do

The so-called affordability calculation is the decisive criterion dictating how affordable your property is. And affordability is always calculated similarly, regardless of whether the income is from salary or AHV contributions. The following factors count:

• Imputed interest (5% of the mortgage amount).

• Incidental / maintenance costs (approx. 1% of the property value).

• Compulsory amortisation (on 2/3 of the value of the property within 15 years at the latest - usually until the normal retirement age at most).

• The sum of these total imputed property costs should not exceed 1/3 of income.

This is the bill in concrete terms:

So let’s calculate the necessary annual income for a house with a value of CHF 1,000,000 and a mortgage of CHF 750,000 (75%) before and after the pension.

Calculating affordability pre-retirement:

• Calculated interest, 5%: 0.05 x CHF 750,000 = CHF 37,500

• Maintenance costs, 1%: 0.001 x CHF 1,000,000 = CHF 10,000

• Amortisation obligation at 65%: ACTUAL mortgage (CHF 750,000) - INTENDED mortgage (CHF 650,000), distributed over 15 years = CHF 6,666

• Total annual costs: Calculated interest + Maintenance costs + Amortisation = CHF 54,166

• Annual minimum income to ensure viability: Annual costs x 3 = CHF 162,500

Retirement can really impact on your finances, income above all. As a homeowner, it’s important to understand where your retirement income will come from, which includes the AHV pension, pension fund and third pillar.

Most lenders require mandatory amortisation to 65% of the property value by retirement, which eliminates the “mandatory amortisation” item and eases the cost burden somewhat in old age.

Calculation:

• Calculated interest, 5%: 0.05 x CHF 650,000 = CHF 32,500 • Maintenance costs, 1%: 0.001 x CHF 1,000,000 = CHF 10,000 • Calculated interest + Maintenance costs = CHF 42,500 • Annual minimum income to ensure viability: Annual costs x 3 = CHF 127,500

How will that pan out for me when I close on a mortgage?

Plan to win! When the younger among you buy a house, the thrill of moving in and creating memories in your new home is likely top of mind. But when retirement looms, the dwelling of choice you dream of may seem out of reach. Don’t give up. A few smart decisions suffice to ensure your dream home remains affordable, even after you retire. The under-45s among you probably won’t hear about this from your mortgage provider. The onus is very much on you to take the initiative. If you’re over 50, however, facing this head-on is a must. Consider all possibilities, however uncomfortable. This includes financial security and affordability in case of disability or death, such as that of your partner. Imagine having to leave your home while grieving – a true nightmare scenario!

Beat Eberle, Head of Mortgage Product Management at Mobiliar, advises: “When homebuying, take into account your overall situation, the affordability of the mortgage AND your pension provision. This also applies if your life situation changes – if you become parents, for example, or your workload drops.”

Proactive planning is crucial when buying a home. This is where mortgage providers differ – a good provider will highlight all potential scenarios and provide solutions during the consultation process. Be sure to seek advice from experts, then you’ll be prepared for any eventuality. And you can age in peace in your own home.

Mandatory amortisation & affordability: Is paying in full a good thing?

Did you know that you have to pay off two-thirds of your mortgage by the time you retire? In other words, any secondary mortgages must be completely paid off. But beware – even if you have paid off the secondary mortgage long before you retire, there’s no guarantee that the remaining mortgage will be affordable after you leave work. When calculating affordability, a 5% interest rate is always used, which burdens some retirees considerably. The greater the burden on your home, the more challenging it becomes to meet the affordability calculation. If you find yourself unable to afford your mortgage in your later years, your lender might ask for an extra payment or even cancel the mortgage. All of which could trigger the worst-case scenario - having to sell your home. It’s definitely something to consider.

So are you best off paying off as much of the mortgage as possible? “Not necessarily!” says specialist Beat Eberle. “Instead, I recommend building up reserves so that you can reduce the mortgage beyond the mandatory amortisations if necessary”.

And how do I do that? The ideal scenario sees you making mandatory amortisations and other reserves indirectly as far as possible, through a pension product. Instead of paying off the debt directly, you pay into a 3a pension product, which is then used as collateral if necessary. This keeps the interest on the debt the same and remains tax-deductible – a clear win-win.

Beware though: If a 3rd pillar is used as collateral, this security will be taken into account when calculating mandatory amortisations. In other words, the mortgage lender may require that the pledged amount be used to directly amortise the mortgage when you reach the normal retirement age. This would place your pledged 3a balance and, where applicable, a portion of your planned retirement savings out of reach.

Want your dream home for life? Here’s your roadmap to keep your mortgage affordable, even after retirement.

Awesome! Keep at it. As you approach your twilight years, the sooner you tackle affordability, the easier it is to guarantee it. This gives you more time to save and more control over your assets. Keep up the good work!

Here’s how best to ensure portability in old age:

Improve your pension situation: Contributing regularly to the 3rd pillar will help you accumulate assets usable in old age. Another option is to make a voluntary purchase into the pension fund (2nd pillar). This way you can save taxes and boost your retirement pension at the same time. Some restrictions do reply, however – for which you’re best off seeking professional advice.

Saving: “Leverage low-interest periods to make provisions for retirement,” advises Beat Eberle. The hypothetical interest rate is set very high at 5%, while the current real interest rate is around 2.5% (as of January 2023), which means your housing costs are lower than calculated by mortgage providers. Place the money saved on one side. When you reach retirement age, if you have some saved money, you can try to count it as hypothetical income towards affordability. However, not all lenders have the same regulations.

What’s better for savings, 3rd pillar or savings account? Expert tip from Beat Eberle: “Consider how flexible you want your savings to be. To keep things affordable, I always recommend the 3rd pillar due to its tax benefits. You can use the money you put in there for self-occupied real estate, i.e. to pay off your mortgage, but otherwise have limited scope to use any money you placed there for other purposes. If liquidity is important to you and you want your money accessible at any time in an emergency, a savings account makes more sense.”