Real estate: should you rent or buy? | key4.ch

Which is better – to rent or buy a property?

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23.02.2022 | 6 minutes

Many people would love to own their own home, often due to the sense of comfort and long-term security it gives them, as well as the ability to really make the place their own. But what are the more rational, financial reasons for doing so?

Rising real estate prices

Property is generally considered to be a safe investment. Currently, low mortgage interest rates make real estate an attractive investment and the Swiss real estate market is very stable. Property prices have risen sharply in recent years and homeowners have benefited from an increase in the value of their homes.

This trend is expected to continue, especially due to continued low mortgage interest rates. Other factors in favour of further price rises are a lack of investment alternatives and the impact of the Coronavirus pandemic on personal living requirements.

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Real estate is better than a savings account

It’s clear that savings accounts are currently paying zero interest. And experts say this is unlikely to change over the next few years. This means that you cannot earn money on a conventional savings account.

The math is quite simple: If a savings account pays 0.3% interest but inflation is running at 1%, your savings are losing 0.7% of their value every year. The picture is not much better for other reliable investments that are not high risk, such as fixed-term deposits. Even government or corporate bonds only yield returns if there are price gains during the holding period. This is why, in the current climate, real estate is considered a sensible investment option.

Real estate – the perfect pension plan

Real estate has long been one of the most popular retirement investments in Switzerland. This is because pension income from the AHV and a pension fund are usually not enough to maintain the same standard of living in retirement. One of the most common misconceptions concerns the amount of mortgage debt remaining in retirement. Most people want the smallest possible mortgage in retirement but underestimate their expenses after they stop working. The mortgage debt should only be amortized to the extent necessary to ensure affordability while still providing for sufficient liquidity.

Pillar 2 is also under pressure due to higher life expectancy and low interest rates, meaning the minimum interest rate on pension savings is likely to fall. Private retirement savings in pillar 3 are also suffering from low interest rates.

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Which makes most financial sense – to buy or to rent?

Whether it makes more sense to buy or to rent can be assessed using a simplified calculation:

Suppose your monthly rental costs are CHF 1,500, i.e., just under CHF 20,000 a year. And let’s also assume that an equivalent apartment would cost CHF 500,000 to buy.The lending criteria of financial institutions stipulate that at least 20 percent of the property value, i.e., CHF 100,000 must be financed using your own funds. It is important to remember that this money would then be firmly tied up in the property, reducing your overall liquidity. In other words, you could not earn money on this capital by investing it elsewhere.

You take out a mortgage for the remaining CHF 400,000. With an interest rate of 1.00 percent, your monthly interest costs will be CHF 333. In addition, you’ll need to budget 1.00 percent of the property value for maintenance and ancillary costs, i.e., CHF 416. Interest, maintenance and ancillary costs amount to approximately CHF 750.

We now turn to the amortisation. A mortgage debt must be repaid to two-thirds of the purchase price after 15 years or before you retire, whichever comes sooner. In this example, CHF 371 would go towards the amortization. This means the total monthly costs are now CHF 1,121 – CHF 379 a month lower than if you were to rent. This calculation is somewhat simplified but makes it clear that the monthly costs of repaying a mortgage are generally lower than paying rent. This is just one specific example; you must bear in mind that interest costs can change during the period of ownership. Given current low interest rates, you could face much higher interest costs when you come to renew the mortgage.

The key4 mortgage calculator lets you plan using your own figures, calculate what your monthly mortgage would be and compare it to your rental expenses.

Taxes: the obligations and benefits

Taxes must also be included in the calculation: When you buy a property in Switzerland, you become liable to pay a variety of taxes, depending on your individual situation. However, various types of tax relief are also available.

Incidental taxes

Property owners must pay the following taxes:

  • Wealth tax
    Wealth tax on real estate depends on the taxable value of the real estate, which will vary depending on the canton. Mortgage debt can be deducted from the tax due.
  • Income tax
    Income from renting or leasing a property is taxed. And if you live in the property yourself, you’ll need to pay tax on the imputed rental value as if it were income. This value depends on the amount that the property could be rented for on the open market.
  • Property tax
    Property tax is also payable, in addition to the wealth and capital tax already payable by the owner. Unlike wealth tax, property tax is calculated based on the gross value of the plot, i.e., without deducting the value of the mortgage loans. However, some cantons do not levy this tax.

Tax deductions

The following tax deductions are possible:

  • Mortgage interest
    Interest on debts is 100% deductible from your taxable income and this also applies to mortgage interest. The more interest you pay, the lower your taxable income.
  • Indirect amortization
    When a loan is amortized, a certain part of the mortgage is repaid to the lender by the dates stipulated in the agreement. With indirect amortization, these amounts are paid into a retirement savings account or an insurance policy as part of pillar 3a. These deposits can be deducted from your taxable income. After retirement, the capital in pillar 3a is paid out and used to repay the mortgage. This means that the amount of mortgage debt and deductible debt interest remains stable while the payments into pillar 3a reduce your taxable income.
  • Value-preserving renovation and maintenance work
    As a rule, all value-preserving expenses relating to the property are tax-deductible. These include, for example, renovation of the façade, a new roof or a new heating system. The owner can choose whether to deduct the actual costs or use the option of a lump-sum deduction. What exactly counts as deductible maintenance is decided in individual cases by the relevant tax office. Tip: retain copies of the decisions of the tax office about deductions not granted (because they were deemed to add rather than preserve value). You will be able to use them to lower the property gains tax payable when you come to sell the property.

Rent or buy?

Rent or buy? Both alternatives have their pros and cons. The advantages of one are the disadvantages of the other – and vice versa. Below we have summarized the arguments for each option:

Renting – the main benefits

  • Straightforward and flexible (able to move at short notice)
  • Uncommitted financial resources
  • The property management company deals with the running, maintenance, repairs, heating, etc.
  • Repairs and maintenance costs are paid for by the owner

Buying – the main benefits

  • High level of security (no risk of eviction or rent increases)
  • A way of growing your wealth 
  • A reliable way of providing for your retirement
  • Potential increase in value
  • Ability to furnish and decorate your home as you wish
  • You decide on modernization and renovation measures
  • Tax benefits (building maintenance and mortgage interest)
The benefits of buying include a high standard of fitting and interior decoration to your own taste. Example: walk-in wardrobe
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Summary

Owning your own property naturally also means taking responsibility for many things that are not your concern when you rent: interior design, operating costs, maintenance. With a rented property, you are also more flexible and more free to invest your financial resources. From a financial point of view, however, owning your own home has many attractive advantages, given that most of the money you put in is effectively returned to you as a capital investment.

With a clever financing strategy and a good location, your property should also go up in value. Then there are the sentimental factors such as the security of owning your own home, providing for your retirement and the feeling of being, quite literally, “at home.” Which arguments weigh more heavily in the decision whether to rent or buy is also a question of personality type.


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