What are the risks of buying a house and the associated mortgage?
The average debt per capita in the form of mortgage loans in Switzerland is a multiple of the respective assets. It is obvious that this circumstance is associated with considerable risks. What these risks are and how you can prevent and counteract them, you will learn in today’s HYPOHAUS Blog contribution.
The interest rate risk
The financial crisis of 2008 has driven central banks around the world to lower interest rates to record lows. Many borrowers became painfully aware that this was not a permanent state of affairs in 2022, when the interest rate turnaround was initiated. More than ever, this period has shown that addressing the mortgage model you choose is key and can help avoid nasty surprises. Regardless of the model, it is advisable to set aside an amount for personal household budgeting in addition to the regular interest payments due, in order to be able to absorb any future interest rate increases. Furthermore, it is advisable to find out about the current interest rate environment and expected developments early on when mortgages are due, as interest rates can be fixed around 18-24 months in advance.
Risk of high maintenance and ancillary costs
The costs associated with owning a home are not limited to mortgage interest alone. Incidental costs such as electricity, water, gas and ongoing maintenance work can quickly turn the household budget upside down. In order to be able to precisely calculate the expected costs in advance, it is advisable to consult an expert, especially for people without the relevant expertise, in order to be able to make an estimate.
In addition, ongoing provisions can help to cover unexpected renovation costs. As a rule of thumb, an annual reserve for ancillary costs and necessary renovation work amounting to around 1.00% of the property value is well advised. In the case of larger investments, an increase in the existing mortgage should often also be considered in order to prevent liquidity bottlenecks.
Risks of life events such as illness, accident, job loss, death
It can happen that the income situation of a household changes completely at once due to illness, accident, job loss or death. This can lead to a situation in which it is almost impossible to cope with current mortgage expenses. To protect yourself against this situation, it is important to deal with the undesirable scenarios in a detailed consultation when taking out a mortgage. An individually tailored insurance solution can ensure that in the event of one of the aforementioned scenarios occurring, the accustomed standard of living for the family can be maintained without restriction and the liabilities in connection with the home can be serviced. If you are interested in a consultation on this topic, please contact us. Our pension experts will be happy to advise you and show you the possibility of securing interest payments, amortization and/or the repayment of a mortgage via a lump sum on death. For a personal consultation, you can submit a request here.
Risk of affordability in retirement
Retirement is usually accompanied by a reduction in income – but the costs associated with owning a home often remain the same. Although most mortgage lenders already ensure at the time of conclusion that the mortgage amount at the time of retirement is still at a maximum of around two-thirds of the loan-to-value ratio, this initial situation can be cause for lenders to reassess creditworthiness.
To ensure a carefree start to the third stage of life, various tips should be followed. Planning for retirement at an early stage is essential to ensure unrestricted enjoyment of one’s own home in retirement. In addition, comprehensive advice on the mortgage product and term as well as the lender is essential. There are huge differences between institutions in this regard, which mortgage borrowers often only become aware of in retrospect.
Risk of the market value of the property
There are many reasons why the value of a property can decline: An attractive view is impaired by construction projects, a new road runs directly along the property line, or the neighborhood loses its attractiveness. Significant adjustments (both positive and negative) in property value can also have an impact on your mortgage. For example, if the loan-to-value ratio is reduced, the lender may demand an extraordinary reduction in the mortgage. To prevent such scenarios, it is advisable to keep a constant eye on the real estate market and the immediate surroundings of the property. A valuation of the property from time to time is also advisable so that early action can be taken in the event of an undesirable trend.
If you would like us to advise you on this topic, we look forward to hearing from you. Your HYPOHAUS team of experts.