Your own home: life goal or investment?

Generally speaking, there is an emotional aspect to owning your own four walls that goes beyond any purely financial considerations. However, it’s crucial you understand the financial consequences of buying, so your home does not become a burden in the future.

A personal financial plan can illustrate how buying a home will impact your living costs and the affordability of other life goals. As a rule, a good investment strategy is needed to save enough equity – taking into account payments into your pension fund and possible early withdrawals. It also allows risks to be identified: for example, a possible cluster risk if a large part of your assets are tied up in the property. Or that your mortgage costs may fluctuate a lot, depending on interest rates, the amount borrowed and the term of the mortgage.

Over the past twenty years, homeowners in Switzerland have benefited from the fact that nominal house prices have risen by an average of 3.9 percent per year. A home buyer with an initial loan-to-value ratio of 80 percent achieved an average annual return on equity of over 10 percent during this period. With the end of negative interest rates, such capital gains are unlikely in the long term. Despite this, residential property should still keep pace with returns from a balanced portfolio strategy. However, capital gains cannot or can only partially be used to finance other life goals, for example, if the property were sold and not replaced by another of equivalent value.

Mortgages have become more expensive since the end of the era of negative interest rates. Money market mortgages, i.e., those with a variable interest rate, fluctuate with every change in key interest rates by the Swiss National Bank. In addition, remember that to comply with affordability criteria on average you now either need to earn around 20 percent more or to invest 50 percent more equity to buy the same-size home anywhere in Switzerland, compared to before the pandemic.

In principle, the value of the property should not be more than six times your income – this includes after you retire, when your income will typically be reduced by 40 to 50 percent. Depending on your income and how much your home increases in value, remember that you may need to contribute extra capital when you retire.

The greater the share of total assets tied up in real estate, the less funds are available for investment in other ways or to cover consumer spending. If you then find you cannot cover your living costs, you may end up having to sell your home.

In general, acquiring a property should be viewed in connection with your pension situation. For example, pension savings are used to finance almost every second home purchase. They are often needed to be able to contribute sufficient equity. The decision whether to take a lump sum or a pension upon retirement must also be considered with a view to ensuring your mortgage remains affordable. In old age, owning your own home offers the possibility of lowering your living costs by foregoing non-essential maintenance of the building. This will allow you to manage any liquidity shortfalls although it will also adversely affect the value of the building.