Housing in old age: a comparison

If you are in the middle of your working life and start a family, you will also be faced with the real estate question at some point: “rent or buy?”. When deciding whether to buy a home or not, people often look ahead to their old age. As the saying goes, you don’t uproot an old tree: it’s rare for pensioners to move home.

What should you consider when making a decision about real estate today from the perspective of a future retiree? We show you the relevant considerations.

For many retirees, the advantages of owning their own home are indispensable. They live in familiar surroundings, do not pay rent and are not at risk of eviction. A change of residence for professional reasons is no longer necessary. It’s no surprise that most people hold onto their property after they retire.

If you want to fulfill your dream of owning your own home today, then as well as current interest rates, you should also consider further interest rate developments. Even in old age, interest payments can still be significant. By the time you retire, you should have paid off your mortgages to a maximum of two-thirds of the loan-to-value ratio of the property. The remaining mortgages must be financed with your retirement income, which is usually lower than your previous salary.

Even after your retirement, banks expect housing costs not to exceed one-third of income. If you have a lot of equity in the property, your retirement savings might have suffered as a result – especially if you withdraw these savings early. However, the value of the property may have increased over the years, meaning that the financing conditions are better.

The costs of running a home are not limited to mortgage interest payments. There are also maintenance and ancillary costs, taxes (imputed rental value, property tax) and renovation costs, which are often underestimated. Affordability is an issue you need to keep an eye on.

If you only try to purchase a property after you retire, you’ll face some additional challenges. Banks, for example, require more equity than the usual 20 percent of the property value. In addition, many advise against long-term mortgages above a certain age.

Unlike property owners, renters are much less committed to a specific place of residence. They therefore enjoy a high degree of flexibility when a career change is imminent or life and family plans change. In old age, this flexibility is often undesirable, and moving because the rental contract has been terminated is difficult for older people.

Whether renting is more advantageous than buying therefore also depends very much on your personal situation – and whether you are willing to perform maintenance work yourself or would prefer to have it carried out by a landlord.

From a financial point of view, renting has mostly been cheaper than buying, historically speaking. Due to low interest rates and rising real estate prices, over the past decade the reverse has been the case. From 2022 onwards, however, interest rates started to rise and property prices stopped going up.

Unlike mortgage repayments, paying rent does not help build retirement savings. You’ll therefore need to save in other ways to cover your living expenses and rent in old age. In this case, the available capital can be used more freely for savings than when buying real estate.

From a financial point of view, whether it is more worthwhile to rent or own a home in old age depends on these three factors:

1. Total housing costs
2. Interest rate situation
3. Property prices

We will now run through a calculation using an imaginary example, the Jones family.

Cost changes: own home vs. rental property

The Jones family – two children, parents 45 years old – would like to move to a new apartment in a medium-sized municipality. The parents want to live in the property for the rest of their lives. They are faced with the question of whether to rent or buy.

The family could buy a home for CHF 1 million, 80 percent of which is financed with a medium- to long-term mortgage (mortgage interest rates 1 to 1.5 percent). The alternative – a comparable rental apartment – would cost CHF 3,000 a month.

Taking into account the factors mentioned above, the annual costs of owning a home would currently be a good CHF 5,000 lower than those of a rented apartment.

However, whether renting or buying is the better financial strategy in the long term depends on the long-term development of interest rates and property prices.

Interest rate trends: own home vs. rental property

In our example, we assume that the Jones family profitably invests the annual cost savings that they achieve by buying rather than renting. In addition, they save CHF 8,000 a year in an annual renovation fund (0.8 percent of the purchase price), which also pays interest. After 20 years – just in time for retirement – they undertake a major renovation at a cost of CHF 200,000.

In the example, the Jones family is better off owning their own home, provided mortgage interest rates do not rise significantly above 2.5 percent in the long term. There is a margin for a doubling of mortgage costs. In this scenario, they also have enough savings to finance the renovation after 20 years.

If mortgage interest rates were to rise to 3 percent, the renovation costs would still be covered. Overall, however, the cost of renting an apartment would be lower until the end of their lives. However, if mortgage interest rates were to rise to 4 percent or higher in the longer term, this would jeopardize both the renovation and affordability. The cost of owning a home after retirement would be more than a third of their income. Financing is then only possible if the Jones family limits its spending.

Change in value: own home vs. rental property

In addition to the costs, the possible change in the value of real estate must also be taken into account. Real estate offers protection against inflation. Since the turn of the millennium, the price of real estate has also increased significantly in real terms (by more than 70 percent).

However, further significant real-terms price increases are unlikely and price falls – due to the state of the economy, the attractiveness of the location or a significant rise in interest rates – cannot be ruled out. Currently, our example shows that over a period of ten years owning a home would be CHF 5,000 a year cheaper than renting an apartment. This represents a buffer of around 5 percent should property prices fall. If prices were to fall by up to 40 percent, this buffer would not be sufficient.

Most people want to stay in their apartment or house into old age, whether they own it or not. But what other options are there?

Apartment sharing in retirement

Apartment sharing is a well-known model among students and young professionals. The rents are lower than living by yourself and loneliness is not an issue.

Apartment sharing in old age is still relatively rare, even though there are many advantages in its favor. It alleviates loneliness in old age and leads to lower costs. Seniors who share an apartment can also help each other out with everyday tasks. However, finding suitable roommates is more difficult in old age than when you were a student. It’s more likely to work well if you have known each other for many years.

Housing communities in old age

Housing communities are an interesting alternative. Here, seniors have their own small apartments with a bathroom and kitchen. There are communal facilities such as social rooms or medical equipment. This makes it easier to do things together.