Real estate financing in old age: challenges and tips

Financing real estate after you retire can be a challenge. To ensure the affordability of a mortgage in old age, it pays to start planning early. What you need to consider as well as some tips on financing your own home in retirement.

You essentially face two challenges when financing real estate after you have retired. Firstly, you must be able to guarantee that you can still afford the mortgage even with a lower income, so affordability will be recalculated taking this factor into account. Secondly, your mortgage may not exceed two thirds of the mortgage loan-to-value ratio. Find out below what this actually means.

After retirement, your financial circumstances may change considerably, which is why lenders reassess the affordability of your real estate financing or mortgage. Future income, which is made up of AHV and pension fund pensions, is recalculated accordingly. This roughly corresponds to 60 percent of your previous income. Add free assets from pillar 3a or securities to this. Lenders often include this in the affordability calculation.

On the expenditures side, there are the fixed costs for home ownership, which must not exceed one third of household income. The mortgage is not calculated based on current interest rates but on an imputed interest rate of 5 percent.

Another difference in the affordability calculation in old age is the maximum loan-to-value ratio after retirement of around 65 percent of the property value instead of the 80 percent while you’re still working. However, this is not normally a problem, as the law provides for mandatory amortization of the 15 percent difference anyway. This is generally arranged with the second mortgage, which must be repaid within 15 years but no later than retirement.
 

In general, the following applies to mortgage lending in old age: Even if the loan-to-value ratio is moderate (e.g., 65 percent) and the amortization obligation has been met, affordability on retirement is still not always guaranteed. If the borrower has not sufficiently amortized the mortgage by the time they retire, they may find their mortgage hard to afford when they reach retirement.

It is important that you discuss this with your mortgage lender at an early stage to avoid any unpleasant surprises.

Early planning is key to ensuring you can finance your home ownership in old age. We recommend a time horizon of 10 to 15 years before retirement. This means that there is still enough time to fill any financial gaps and adjust the financing strategy. As a rule of thumb, the more restricted the affordability of the property in old age becomes, the earlier and more precisely you should tackle the financial planning.

In principle, you have two main options. You can increase your income after retirement or reduce your fixed costs early on for the period after retirement.
 

You can obtain the capital for financing real estate from various sources. This includes retirement savings.

Financing with early withdrawal

For a while, it was popular to withdraw pension fund assets to purchase residential property (home ownership promotion). However, if these early withdrawals are not repaid by the time you retire, your retirement pension may be considerably reduced. Experience shows that many people are not aware that a gap is opening up in their pension provision. This can later have an unfavorable impact on financial security in retirement. Advance withdrawals from the pension fund should be repaid whenever possible.

Financing by pledging

Instead of withdrawing your pension fund assets in advance, you have the option of pledging them as collateral. When you do this, you pledge your funds to the bank as security without withdrawing them, which means that the mortgage interest you pay to the bank stays the same, but you can deduct it from your taxes accordingly. At the same time, you can also deduct the pension contributions from your taxes. The accumulated capital is paid out on retirement and used for the amortization repayment.

Please note: If you want to finance or amortize home ownership or a mortgage after the age of 50 with the help of an advance withdrawal or pledge, the maximum vested benefits available to you are those that you could have claimed at the age of 50 or half of the vested benefits at the time of withdrawal. Find out more about the promotion of home ownership with the help of occupational pension benefits. 

Many property owners are inclined to take out long-term fixed-rate mortgages, some with terms of more than ten years, believing themselves to be safe when it comes to mortgage interest rates. But long-term fixed-rate mortgages can be more expensive than SARON mortgages, depending on the current interest rate environment.

What’s more, some homeowners want to move into an age-appropriate condominium after retirement. But to do so, the fixed-rate mortgage must be transferred to the new home or canceled.

With early financial planning and a good investment strategy, it is usually easy to finance home ownership in old age. It is important that you seek good and exhaustive advice from a mortgage expert. Basically, you want to find a healthy balance so you do not tie up too much capital in your property and keep sufficient liquid funds available. At the same time, affordability should be ensured and the mortgage paid off to such an extent that the interest rate is not too high.