Many people consider their own home their castle and, in financial terms, their retirement nest egg. When it comes to senior citizens financing real estate, though, there are now new regulations pertaining to refinancing mortgages.
The lovely single-family home at the edge of a mid-sized city has gained in value in the last few years. A typical married couple, both 61 years old, have meticulously maintained their home, and over the years they have paid down their bank debt considerably. However, they have bad memories about the most recent meeting with their bank’s customer service representative. The bank refused to increase their mortgage for a greenhouse and some modest renovations; quite the contrary, their loan institution expects more in terms of amortisation starting the next year.
When your income drops
As shown in this example, more than a few dreams have gone up in smoke for debtors who reach the age of 55 or 60. They often fail to make the grade when it comes to the amount they can afford to pay back. Keep in mind that when going into retirement, incomes often drop by 25 to 30 per cent. Banks use future retirement income as the basis for their calculations even several years prior to retirement. Thus, it quite often happens that you must fear you can no longer meet the “affordability test” whereby housing costs can account for at most a third of income after retirement – in other words, social security and company pensions. Further, banks apply a high mortgage rate of 5 per cent on the debtor, who must also make amortisation payments and cover other incidental expenses in addition to the fixed costs. Because the National Bank and other authorities are pushing banks to be more conservative when issuing loans, many applications undergo a very critical review.
Especially for renovations, do not forget that many banks do not consider many projects as increasing home value, and thus they can be only partially financed by banks, if at all. Thus, those who would like to enjoy a magnificent home in retirement and in addition would like to have plenty of spare funds at all times must either start saving very early or else win the lottery.
Amortising loans – but how?
To create financial headroom, you need the proper amortisation strategy. Those who are in debt up to their ears will find matters quite difficult if interest rates rise. A high amount of debt also makes you dependent on the creditor. Thus there’s a good reason for the rule that mortgages should be amortised to two-thirds of the collateral value within 20 years. Near retirement age, be sure to take a critical look at future income and expenses: it must be possible to cover the remaining balance on the principal for the home along with continuing fixed costs plus, of course, living expenses and leisure time activities from retirement income.
Financial planning is very worthwhile!
In Switzerland, disciplined homeowners who quickly amortise their debt are penalised when it comes to taxes – it is well known that by taking this path you can deduct less mortgage interest from your income, but even so you must pay taxes on the full imputed rental value of your own home. Based on careful financial and tax planning, though, there is certainly a suitable strategy for every situation which keeps the budget balanced. Those who want to retire with plenty of assets and enjoy their own home without any worries should start making the appropriate moves when they turn 50. The earlier the better. Build up a reserve fund for later renovations or unexpected events, contribute to your Pillar 3a and 3b plans, and make up any deficiencies in your company retirement fund. By doing so, you have the required security and a financial buffer so that your real estate can be a key element of your personal retirement provisions.