Buying property: save wisely and realize your dreams

For many Swiss people, owning their own home is a lifelong dream. However, property market prices are relatively high and banks are imposing stricter rules on mortgages than before. Do you want to buy property now? The following applies: First do the math and save, then buy!

Is it one of your fundamental lifelong dreams “to buy property”? Lots of people have this dream from as young as 20 or 25. Others prefer to wait before venturing on to the property ladder.  However, the economic climate has changed in recent years. In many places, property prices have risen dramatically. Previously, an average home would cost around 600,000 Swiss francs. A required deposit of 20 percent meant that savings of 120,000 Swiss francs used to be enough to fulfill your dreams of getting on the property ladder.

Buying property: more money in your own pocket

Prices in well-to-do locations more than anywhere have skyrocketed in the last ten years. In the Zürich area, around Lake Geneva and in other particularly popular regions, owning your own flat or house will easily set you back upwards of 1 to 1.5 million Swiss francs. Sometimes the cost is even higher: These days, owning a house with three or more bedrooms in the Zürich area will set you back in the region of at least 1.5 million Swiss francs. The size of the deposit needed for such a purchase has climbed to a whopping 300,000 Swiss francs – in some cases double what it used to be.

Anyone dreaming of owning their own home who wishes to raise money, should first choose between these two different options:

  • Option 1: You want to own property relatively soon, e.g. within the next one to two years.
  • Option 2: Your ambitions are more long term and you want to save money at a young age in order to be able to fulfill your dreams on getting on the property ladder later in life.

Let’s analyze Option 1 first of all:  A period of one or two years is too short, for example, to generate any income from stocks or other securities. That would require a longer term investment horizon. If you still want to buy property relatively quickly, you need to consider other sources of income: Could you utilize your pension fund or pillar 3a, for example? Furthermore, advance inheritance payments or gifts within the family are popular and definitely viable options.

Maybe your parents have enough savings? Such an injection of finances can count as equity capital, provided that it is specifically not a repayable, interest-bearing loan. In order to avoid any ill feeling – particularly among families with multiple children – any advance inheritance payment or gift should be made in writing and arranged in the proper manner. As regards future distributions of an estate or inheritance, such family allowance payments must, of course, be fully allowed for.

In 2017, home mortgage interest rates are at rock bottom. Nevertheless, the following still applies: First do the math, then buy. (Picture: fotolia)

Buying property: Save with pillar 3a

It may be the case that you have set your sights on “buying property” at a later date (Option 2). Are you only 25, planning on starting a family and dream of owning your own home at some point in the future?   Here, the following motto applies: The sooner and more systematically you start the save, the sooner you will be able to realize your ambitions of owning your own home. One saving method available to those living in Switzerland is pillar 3a: If your income is liable for OASI deductions, you can, in principle, take advantage of this. Yearly payments into pillar 3a are fully deductible from taxable income.  Therefore, you benefit twice: On the one hand, you save money to fund buying your own home or to make prudent financial provisions; on the other hand, you save on income tax.

If, for example, a young couple takes full advantage of this by paying in yearly contributions, they will start to see a considerable return after only a few years. This is all the more true, when both partners pay in the permitted maximum yearly allowance. Pillar 3a funds can be used in a range of ways, within the scope of helping people get on the property ladder, for owning your own home (buying, construction, later repayments, etc.). That’s why pillar 3a represents an important tool on the path to your goal of “buying property”!

If you want to save for your own home in the longer term, you can get advice from your bank and, for instance, pursue a course of action involving the usual investment tools (shares, funds, fixed-rate interest investments). If you choose this method, it’s necessary to establish the risk factors involved and to choose a suitable investment strategy. One example: If you are willing to take risks and have a longer term investment horizon, you can invest any spare assets in shares. Needless to say it is important to have a realistic idea of the price bracket you will be able to afford from the outset, when buying your own home.

 

Buying property: Some prospective buyers prefer to save in the longer term and treat themselves to a top of the range property. (Picture: fotolia)

Buy property: stay solvent!

After all, it seems as though we’re generally getting short-changed these days, when it comes to saving and accumulating funds. Even for those who already own their own house or flat, saving is an important virtue. Financial savings can turn out to be important for covering unforeseen repairs. And since the ravages of time gnaw away at all buildings, sooner or later, large-scale repairs or refurbishments will need to be paid for. The challenges in the energy sector are continuously on the rise at the moment, and many buildings will need to be upgraded and modernized in years to come.

One issue that is often discussed, for example, is the extent to which a mortgage is financially viable in retirement and beyond. If you also want to enjoy owning your own home during your retirement, without financial concerns, you must devise an effective savings plan – and implement it accordingly. Those who build up savings have more room to play with when it comes to:

  • Filling any possible gaps in the pension fund (due to prior capital earnings used for home ownership)
  • Attributing the mortgage to a reasonable, financially viable rate during retirement.

Buying property: calculating affordability

In the same way that it has become increasingly more difficult to raise capital on your own, it will also be necessary to assess realistic income requirements. As tempting as it may seem – when calculating affordability, you cannot assume the current rock bottom interest rates will continue. In line with usual standards, which are not going to change for the time being, you would need to be able to afford a loan at the higher rate of five percent interest.

The banks and regulatory authorities abide by this rule, in order to create a certain safety buffer, in case there is a reversal of the current economic trend as regards interest rates.  The calculated cost, assuming an interest rate of five percent, plus repayment obligations and additional expenses, must not exceed a third of your disposable gross income (affordability). Therefore, if you want, to buy a house or flat worth 800,000 Swiss francs, for example, you will need to be able to prove you earn a gross income of over 150,000 Swiss francs.

If you want to buy property, the following motto also applies in this respect. Do the math properly and plan thoroughly first, then buy!

 

Buying property: When you plan well financially, your house will not be built on shifting sands. (Picture: fotolia)

Haben Sie in Ihrem Budget nichts vergessen? - Zinsen, Amortisationen, Nebenkosten, Unterhalt, Unvorhergesehenes. (Bild: fotolia)

Have you remembered to include everything in your budget? – interest, amortizations, additional costs, maintenance, contingency plans. (Picture: fotolia)