Keeping your mortgage affordable when you retire

For many people, owning their home is a secure component of their retirement provision. The legislator promotes this type of pension provision, for example by allowing advance withdrawals of pension capital from the second pillar and pillar 3a to purchase residential property.

Owning a home is intended to enable affordable, rent-free living after retirement. Instead of providing financial relief, however, the property can also become a burden in old age. This can happen if, after retirement, costs are disproportionate to income.

The term “affordability” refers to a reasonable ratio between the regular financial costs of a property and the borrower’s income.

After retirement, income generally comprises the benefits from the AHV and the pension fund, which together account for approximately 60 to 70 percent of the previous income from gainful employment. In the best case, you can supplement your retirement income with private savings, such as from pillar 3a. After retirement, however, many people thus have less money available than they had while they were still working.

If they have a mortgage, it may no longer meet the affordability criteria. In addition to the burden of interest payments, there may be financing problems if owners want to switch lenders or increase the mortgage for a major renovation. When a homeowner retires, banks often check as standard whether the affordability criteria are still met.

Increases in the property’s value can provide relief for retirees. In addition, they have generally repaid the second mortgage by the time they retire. As a result, around 15 percent of the property’s value has generally been paid off, which means that interest is no longer accrued on this portion.

Nevertheless, in order to ensure the affordability of just the first mortgage after retirement, as it can amount to up to two-thirds of the property’s value, a homeowner needs a comparatively high income during retirement.

To ensure affordability, there are two possible approaches. On the one hand, you can increase the income available to you after retirement. On the other, you can reduce the costs of owning your own home after you retire. Of course, you could do both. Which of these two options is possible for you can best be determined during a personal consultation.

Increase income

Once you’ve retired, it’s difficult to increase your income further. If you have sufficient living space, you could consider subletting a self-contained apartment. In addition, it’s easier nowadays to continue working after you reach the reference age and thus boost your earnings this way. You could defer drawing your pension or only partially retire until you reach the age of 70.
By contrast, if you plan your retirement in advance, you can optimize your income from the state pension (AHV), pension fund and pillar 3a. For example, you can ensure sufficient liquidity during retirement by repaying any advance withdrawals of pension fund assets to purchase residential property in good time and by closing contribution gaps in your pension fund and AHV. In addition, you can ensure you save the maximum amount in your private pension provision.

Reduce costs

You can reduce your residential property costs by repaying some or all of your mortgage. The lower the mortgage, the lower the interest burden. In the sample calculation shown, a relatively small repayment – here it is CHF 75,000 – ensures affordability in retirement.

The example shows how a mortgage can remain affordable by making a repayment of CHF 75,000.

However, tax aspects also affect whether the repayment is worthwhile. After all, any mortgage interest you pay can be deducted from your taxable income. By making a repayment, you also forgo income that would have been generated by investing your savings.

In any case, you should be aware that while repaying as much of your mortgage as possible before retirement can relieve the financial burden when you retire, this can cause problems if you have severely restricted your financial flexibility. You may not have any reserves at your disposal in the event of unexpected expenses. After retirement, it’s not as easy to increase your mortgage again in to obtain liquidity. Therefore, it’s better to only repay it if you still have disposable assets set aside.

Tip: It’s best to start renovating the property to make it suitable for senior living before you retire. From a tax perspective, this means you can use your comparatively higher income while you’re still employed to cover the renovation costs, rather than your pension assets. You can deduct value-maintaining and energy-saving investments from your taxable income.

Factoring in disposable assets

In addition to your income as a retiree, you can generally include a portion of your assets in the affordability calculation. To do this, you need assets in accounts or listed securities that are easy to trade.

Ensuring the affordability of residential property in the event of death

If your partner dies, it may jeopardize the affordability of the mortgage, especially if the regular primary income for the household disappears. Check with the mortgage lender whether the survivors’ benefits reduce the gap sufficiently to meet the affordability criterion. If not, in the worst case this could result in the surviving dependents having to sell the property.
You can prevent this scenario by taking suitable pension measures in favor of your partner. When you’re looking at estate planning, take pension fund, third pillar, life insurance, inheritance and financing planning into consideration – as early as possible.

In addition to ensuring affordability, there are other ways to deal with residential property in your later years, such as passing it on to your children, selling it, and switching to a new, more cost-effective living arrangement. What is right for you depends on your individual circumstances and your wishes. The sooner you plan, the better.

Transfer residential property to children

In principle, parents can transfer their residential property to their children. If they agree on a residential right or a right of usufruct, they can even continue to live there. But then you will remain responsible for paying the mortgage and the interest. The advantage is that the future ownership is clarified at an early stage.

If there are several children, inheritance obligations must be observed. If the house is transferred to only one of the children, the parents or the beneficiary child must pay the other siblings. In order to receive the capital for the payout, the existing mortgage could be increased. However, this can only be done if affordability is guaranteed. This means that heirs must also be able to cover the current living costs.

Before taking this step, consider the pension aspects: if you have too little income to cover your expenses when you retire, the early transfer of assets could jeopardize your entitlement to supplementary benefits. This is because the assets you give away are attributed to you.

Switch to a smaller apartment

In principle, it’s possible to sell your residential property after retirement to move into a smaller apartment. However, there’s an obstacle to this: it’s not always possible to transfer an existing fixed-rate mortgage to the new condominium or the new owners. Terminating the mortgage can then involve high costs.

If you want to stay in your residential property when you retire, you should consider the affordability of your mortgage in good time. The sooner, the better: you have the all-important leeway to ensure sufficient income in old age before you retire rather than afterwards. We will be happy to advise you and help you to arrange secure real estate financing and retirement provision.