The moving boxes are stored away, the housewarming party is over – life in your own house can finally begin. But what ongoing costs do homeowners need to factor into their budget? Find out in the following blog post the monthly expenses that come with owning a house and discover tips on how to optimize them.
A quaint little house nestled amidst greenery, with a garden adorned by an apple tree and surrounded by nature. Mom and Dad are standing on the lawn, laughing, while their two children playfully run around the house.
The drawing made by their son perfectly captures the big dream of Andrea (39) and Stefan (42) Berger. For now, this dream still hangs on the refrigerator in the Swiss family's rental apartment. But the Bergers' goal is clear: they want to turn that scene from the drawing into reality as soon as possible – preferably in the wine region of Zurich. They have already saved up the down payment for the mortgage, but that's not the last financial question the family needs to address. In order to make their dream of owning a little house come true, the Bergers should also consider the monthly expenses that come with homeownership and how they need to plan their budget accordingly.
The topic of cost overview in homeownership is not only relevant for prospective buyers. Existing homeowners can also benefit from dealing with their home budget and optimizing it. We spoke with Jordi Alvarez, a trustee, budget planning expert, and CEO of L&A Premium Consulting AG. He knows exactly what it takes when it comes to budgeting for your own home.
No longer paying rent is one of the many wonderful aspects of homeownership. However, this doesn't imply that there are no more bills associated with owning a home. Several new items need to be factored into your budget. To help you maintain and optimize your budget in the long term, the following provides an overview of all the essential recurring costs for your property.
The most apparent and often the largest ongoing cost factor of homeownership is the mortgage. In addition to the monthly interest, you also need to consider the mandatory amortization of the second mortgage in your budget. The extent of interest burden depends on your individual mortgage. As a rule of thumb, you can estimate a long-term interest rate of 5% to err on the safe side. This is also the safety interest rate used by banks for affordability calculations. However, in reality, mortgage interest rates have not been this high for decades. Jordi Alvarez offers his assessment: "Forecasting interest rate trends is currently difficult, but I consider it rather unrealistic for mortgage interest rates to actually rise to 5%."
If you've taken out a second mortgage, it's important to consider that you must repay it within 15 years when planning your budget. Trustee Jordi Alvarez advises on this matter: "Avoid splitting your mortgage into multiple tranches. Otherwise, during mortgage renewal, you won't have room for negotiation and will have to accept your financial institution's terms. Switching to another bank is only possible when the longer mortgage expires."
So, what does this mean specifically for the Berger family? Let's assume their property costs CHF 1,000,000, and the mortgage amounts to CHF 800,000. Two-thirds of the purchase price, i.e., CHF 666,700, can be covered by the first mortgage. The remaining CHF 133,300 is in the second mortgage, which they must repay within 15 years. As a result, the family's annual costs amount to:
Mortgage: CHF 800,000 * 5% = CHF 40,000
Amortization: CHF 133,300 / 15 = CHF 8,887
In total, the family should therefore include CHF 48,887 per year, or CHF 4,074 per month, for their mortgage in their budget.
Important: Do not confuse amortization with interest costs. While money for mortgage interest is expended, amortization is a long-term investment. With each payment, you gradually own more of your own home.
Another significant cost item that homeowners should consider in their monthly budget is the imputed rental value. This represents the hypothetical income homeowners would earn if they were to rent out their property. This fictional income is added to the taxable income, thus increasing the tax bill. The imputed rental value that needs to be taxed typically corresponds to approximately 60 – 70% of the achievable income if the house were rented out.
On the other hand, homeowners can deduct maintenance costs and paid mortgage interest, among other things, from the taxable income. Expert Jordi Alvarez explains: "The imputed rental value is particularly critical when interest rates are low. When interest rates, like the current 2.8%, are relatively high, the burden from the imputed rental value is smaller. In this case, homeowners can also claim higher deductions, resulting in less significant tax increases."
The exact calculation of the imputed rental value varies from canton to canton, and there is usually little potential for optimization or saving. Moreover, the impact of the imputed rental value on the tax bill is highly individual. Jordi Alvarez recommends: "If you want to know the consequences in advance, you should monitor the interest rate or consult a tax expert early on."
For the Berger family's dream home in the canton of Zurich, the imputed rental value is 3.5% of the taxable value. Let's assume, for simplicity, that the taxable value of the house corresponds to the purchase price of CHF 1,000,000. This means the family's taxable income increases by CHF 35,000 per year.
Good to know: The imputed rental value has long been a subject of controversy in Swiss politics. Currently, the parliament is once again discussing its abolition. Learn more about the details of this proposed change and the potential consequences for homeowners in our comprehensive expert article with National Councillor Franziska Ryser.
Another ongoing expense that should not be overlooked in your budget is home insurance. In case something happens, proper coverage can save you from financial ruin. It is essential to differentiate between building insurance and additional insurances:
Building insurances cover fire and elemental damage and is mandatory in almost all of Switzerland. The few exceptions are the cantons of Ticino, Valais, Geneva, and Appenzell Innerrhoden.
Additional insurances encompass a variety of other insurances that you can take out as needed. These include, for example, glass breakage insurance, earthquake insurance, and water damage insurance.
Which additional insurances are necessary or useful in individual cases depends on many factors. Jordi Alvarez reminds us: "They are often portrayed as something unnecessary, but they are not. It's essential to conduct a thorough risk analysis, ideally in collaboration with an expert. This way, you can assess which risks you can and want to bear and which ones you prefer to insure against. Moreover, insurance companies continuously introduce new products and improve their insurance terms. To save costs, it is advisable to regularly review and, if necessary, adjust your insurance coverage and products."
For the Berger family in the canton of Zurich, the annual costs for building insurance, including water damage, earthquake, and glass breakage insurance, amount to approximately CHF 1,000. Keep in mind that insurance premiums vary significantly among different providers and regulations in each canton.
Finally, expert Jordi Alvarez draws attention to an important protection that is not immediately associated with homeownership but is of great significance: "Do not neglect personal accident and death risks! If the household income is largely or completely lost in the event of a serious incident, the financing of the mortgage is at risk in most cases. If you are not adequately insured in this regard, you may be forced to give up your home during the mourning phase."
Of course, everyday life in your own home also incurs monthly expenses. These include ancillary costs such as heating and electricity, as well as ongoing maintenance costs required for repairs and the upkeep of the building and property.
Expert Jordi Alvarez shares his rule of thumb for calculating these costs: "You should budget 1.5% of the building's value per year for ancillary and maintenance costs. Additionally, I recommend setting aside the same amount as a provision for major renovations. In total, you should reserve 3% of the building's value per year." For the Berger family and their house valued at CHF 1,000,000, this means they should allocate CHF 30,000 per year for ancillary and maintenance costs, as well as significant renovations.
The most effective way to reduce ongoing ancillary and maintenance costs lies in increasing energy efficiency. Modern heat pump heating systems as replacements for old oil heaters, good insulation, and modern windows offer significant energy-saving potential and can significantly reduce your ongoing costs in the long term.
Tip: "Conduct an energy audit based on the GEAK standard and energetically renovate your home. This measure can help reduce household energy expenses by up to one-third," advises expert Jordi Alvarez.
Now that we know what ongoing costs homeownership entails and the rules of thumb to consider when calculating them, let's see how to do the budgeting in practice. The example of the Berger family makes it more illustrative. We'll exclude the impact of the imputed rental value on taxes from the calculation as it depends on various individual factors.
All the information we need is the purchase price of CHF 1,000,000, the amount of the mortgage at CHF 800,000, the portion of the second mortgage at CHF 133,300, and the insurance premiums of CHF 1,000.
In their calculation, the Berger family focuses on the most significant ongoing costs. They budget the following ongoing costs:
Mortgage Interest (CHF 800,000 * 5%)
Maintenance and Ancillary Costs (CHF 1,000,000 * 1.5%)
Total Ongoing Costs
There are two things to consider in this calculation: First, the Berger family uses the fictional mortgage interest rate of 5%, which is also used by banks. In reality, their actual mortgage costs are likely to be lower than budgeted here. The buffer that the Berger family creates can be incorporated into reserves. Secondly, the Berger family should consider that with a new building, there are usually construction guarantees that cover damages to the property in the first year after completion. In this case, the costs for a new building would initially be lower than stated above.
In the next step, the Berger family looks at amortization costs and additional reserves for more extensive renovations. They want to list these separately as they are investments in the future. By investing in the preservation and long-term maintenance of their home, the Bergers not only create a beautiful home for the present but also lay a solid foundation for their future. The property can become a valuable asset in retirement.
The Berger family calculates the investment costs in their property as follows:
Investments in the Home
Amortization of the 2nd Mortgage (CHF 133,300 / 15 years)
Additional Reserves (CHF 1,000,000 * 1.5%)
To calculate the total potential costs, the Berger family now adds the ongoing costs and the investments in the home: Overall, the Berger family should budget for costs of approximately CHF 79,887 per year or CHF 6,657 per month.
This amount may initially seem quite substantial! But don't let that deter you. As mentioned before, a large portion of this sum represents investments in the future. By amortizing, the family reduces their debt and supports their equity build-up. Moreover, the calculation includes a significant safety cushion, factoring in a mortgage interest rate of 5% and a total of 3% of the property value for incidental and maintenance costs. Not only do these expenses maintain the value of your home, but they are also tax-deductible in most cases. Additionally, there's the option of indirect mortgage amortization through the 3rd pillar, which brings further tax advantages. You can find more detailed information on direct and indirect amortization here.
To stay on the safe side, Andrea and Stefan Berger would benefit from comprehensive advice from a fiduciary office or a tax advisor. By collaborating with experts, they can uncover potential risks and savings opportunities they might not have considered. This can lead to significant long-term savings.