Taking out a mortgage in old age: what you need to know

Your financial circumstances may change significantly in old age. As a rule, your income after retirement will be around 30 percent lower. Depending on your retirement savings it may decrease significantly. For this reason, many banks check the affordability of financing based on your individual situation and pension assets at the start of retirement. As a result, some homeowners suddenly have to sell their properties. However this does not happen often.

Before this occurs, mortgage holders have a number of options for adjusting their mortgage burden to their financial situation in old age. These options include, for example, the use of pension assets, amortization, the mortgage term and financing alternatives. You should consider these and other points at an early stage in order to be able to plan for the long term. By doing so, most mortgage clients have repaid their second mortgage by the time they retire.

Many people are also helped by price developments on the real estate market when it comes to financing a house in old age. According to RealAdvisor, the price per square meter of houses and apartments in Switzerland has increased by around 85 percent since the year 2000. So if you previously bought a property and are retiring today, your home may have gone up in value. Even if this does not apply equally to all properties and all locations, an estimate of the current value could have a positive effect on affordability and loan-to-value for many.

What is certain is that retirement is usually not a reason to sell your home. On the contrary: the closer most people get to retirement age, the less keen they are to move. Most people who own real estate wish to hold on to it in old age. Renters are more likely to take retirement as an opportunity to consolidate their financial situation and make adjustments if necessary.

The conditions for financing real estate in old age change even before retirement. From the age of 50, different rules apply to the early withdrawal of pension assets from pillar 2. Up to this age, all of the capital is available for the purchase of residential property without restrictions. After that, you may only use the vested benefits that were available to you at the age of 50.

Alternatively, you can use half of the vested benefits at the time of receipt, whichever is higher. Unless your pension fund provides otherwise, you can only make use of such an early withdrawal up to three years before you are entitled to retirement benefits.

You can also withdraw funds from pillar 3a in advance. Looking ahead to retirement, however, the possibility of using accumulated pillar 3a assets to indirectly amortize your mortgage is particularly interesting.

Plan your retirement and repayments

If you withdraw money from pillar 2 and pillar 3a retirement savings in advance, the assets you have saved in the pension funds for retirement will initially decrease. In the worst case, this may cause a pension gap. Different rules apply to deposits and withdrawals in the different pillars. Advance withdrawals from pillar 2, the occupational pension scheme, must be paid back by the start of retirement. Only then will you be able to make voluntary additional payments (“buy-ins”), which can be attractive tax-wise, especially in the years before retirement. In contrast, repayments and purchases are not possible in pillar 3a.

You are advised to review your financial strategy before retiring. About 15 years before retirement is sufficient. An essential point is to think about where you want to live after retirement. Will you stay in your own home or are you looking for something new?

Not only the following financing issues depend on the decision. The resulting conversion and renovation measures in order to make the property senior-friendly and fit for the future must also be considered. These should be planned as early as possible and, ideally, carried out before retirement. At the very least, value-preserving and energy-saving investments can be deducted from taxable income, which is higher before retirement.

Some banks recalculate affordability when you retire. Each bank calculates assets and pension payments differently. You may find that one bank will continue to finance a property at retirement age without any problems, while another will not.

At UBS, we take into account your personal situation as well as your income and expenses, which we analyze in consultation with you. This will give you an idea of your financial situation in retirement and help you plan your next steps.