Affordability calculation: how much money do you need to purchase your own home?

15.09.2020 | 5 Minutes

Affordability is a key concept in financing and the mortgage business. It refers to the relationship between income on the one hand and the costs of owning a home on the other. It is expressed as a percentage and represents a key figure for the affordability of a loan.

Anyone wanting to find a home for less than a million francs in popular residential locations in the greater Zurich or Lake Geneva region has to search for a long time nowadays. Prices in many “hot spots” of the real estate market have risen sharply over the last 10 to 15 years. And as incomes have not increased to the same extent, it is becoming more difficult for some households to meet the requirements for taking out a mortgage.

Mortgage affordability: the right way to calculate

What is the right way to determine the financial affordability of a mortgage? The guidelines of the Swiss Bankers Association (SBA) state that affordability must be ensured in the long term and must therefore be based on sustainable revenue and expenditure components.

The “golden rule” of financing is clear: the mortgage is generally considered to be affordable if the total cost of home ownership does not exceed one third of gross income (income before social security contributions such as AHV, ALV, etc.).

On the revenue side, documented and sustainably achievable income must be taken into account in the affordability calculation. This includes income from gainful employment verified on the basis of documents such as the salary statement, including the 13th month’s salary. Any bonus payments or forthcoming salary increases can be included to some extent, provided they are regular or well documented. A second income from the spouse may be added provided that it is sustainable. This means that income that is merely temporary – that is only generated in one year, for example – cannot be taken into account. At the same time, however, the couple must be jointly and severally liable for all obligations arising from the loan.

A woman is standing at a table with a laptop, talking on the phone and taking notes.

Affordability calculation: the cost side

The following costs must be added together to check affordability:

  • Mortgage interest (calculated with an imputed interest rate of five percent)
  • The required repayments or amortization
  • The maintenance costs and incidental expenses of the house or apartment (rule of thumb: one percent of the value).

Verifying affordability is an essential step on the path towards owning your own home. The basic question always remains the same: “What’s the maximum price of my new home?” key4 by UBS automatically calculates affordability with just a few pieces of information.

How does the bank assess affordability?

For the mortgage provider, the affordability calculation is a key part of the credit assessment, and the relevant industry guidelines obligate them to carry out this calculation. It is based on a predefined, documented procedure. The provider is also bound by the principle of not using the daily low interest rates in the affordability calculation. Calculating affordability means using a longer-term average interest rate (known as the imputed rate of interest). The interest rate varies depending on the bank.

Mortgage affordability: caution is the watchword

There are two valid arguments for being prudent when calculating affordability:

  • The threshold of one third of gross income is undisputed. Otherwise, many households – especially those from the middle class – would have to make excessive cutbacks elsewhere, for example on vacations, restaurant visits, leisure activities etc.
  • The conservative calculation of affordability with an interest rate of five percent includes a safety margin. Future purchasers who fulfill the affordability calculation could usually cope with a higher interest rate level. This massively reduces the risk that owning a home could lead to over-indebtedness.

Affordability calculation: mortgage and incidental expenses

When it comes to financing, the loan repayments – not counting interest – must be budgeted correctly. According to the above-mentioned guidelines for owner-occupied residential property, each client must reduce their mortgage to two-thirds of the value of the property within 15 years (different rules apply to vacation or investment properties). You have the choice of paying back the amortization directly or indirectly, for example via the 3rd pillar (form of private savings and private retirement planning). However, the annual amortization rates must always be part of the planned budget.

A man kneels in front of a washbasin in the bathroom and screws in a replacement drain system.

The third cost factor is incidental expenses. Here it is customary in the industry to use one percent of the property value. For a single-family house at a purchase price of one million francs, 10,000 francs would have to be budgeted each year. This includes various expenses: heating or energy, electricity, water, maintenance, repairs, building insurance, garden maintenance etc. In the case of an apartment (condominium ownership), the shared costs in the building are also included in incidental expenses (cost contributions for administration and maintenance, or payments into a renovation fund).

This one percent rule is used for the affordability calculation during credit checks and advisory sessions. Older properties may also incur higher maintenance and renovation costs.

Conclusion: the following motto clearly applies to the purchase of residential property: first budget and calculate, then buy. It is in the client’s own interest to carefully observe the rules of affordability. This prevents financial difficulties later on and guarantees that you can enjoy your own home without anything to worry about.

Table: affordability calculation

The Example family has a gross income of 150,000 francs and would like to buy a house for 820,000 francs.

The affordability calculation for the mortgage compares their income with the imputed costs:

Purchase price of the property CHF 820 000
Available equity CHF 180 000
Gross household income CHF 150 000
Mortgage amount CHF 640 000

Affordability calculation: monthly cost of home ownership in relation to income

Interest CHF 2 667
Amortization CHF 519
Maintenance costs and incidental expenses CHF 683
Imputed costs per month CHF 3 869
Imputed costs per year CHF 46 428
Gross income in relation to imputed costs per year CHF 150 000 / CHF 46 428
Affordability (as a percentage of gross income) 31%

Calculation basis

Mortgage CHF 640 000
Loan-to-value ratio as a percent of the purchase price 78%

The affordability calculation shows that the home and the mortgage for the Example family would be easily affordable – about 31 percent of gross income would go to the “own home” account.

Cost of residential property as a % of

total income (gross)

Cost of residential property as a % of total income (gross) Running costs max. 33%

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