I am puzzled since a while regarding how buying vs renting works here in CH.
I know several people that decided to buy and explaining the advantage on it, i.e. going, for instance, 2kCHF rent to 1kCHF mortgage.
Assuming a cost of 1M and 25 years of mortgage, this means 200k cash at the moment of buying + 300k in 25 years (25 * 12 * 1000): how about the other 500k?
I understand people tend to pay the interest back but not really payback the whole mortgage, but I am very confuse on how this works…
Can anyone please help clarifying?
Many thanks in advance.
Usually the bank will give you a mortgage of 80% of the price, if you have a high enough salary they will go up to 90%. The other 10-20% are your own assets. Now you have the obligation to pay the mortgage down to 66.6% within 15 years. Let’s make an example:
House price: 1000k Own assets: 200k Mortgage: 800k Amortisation: 133k / 15 years = 8.9k per year
You can either do this directly on a quarterly basis (together with charged interest) or indirectly with payments to a 3rd pillar account (pledged to the house). After you reduced the mortgage to 666k or alternatively there is 134k on your pledged 3rd pillar account, the bank won’t demand any further amortisation payments.
You can pay it down completely (having no mortgage) but that makes zero sense in Switzerland. You can deduct interest from your taxable income and the mortgage from your wealth (which is taxed too). So paying it down any further will just increase your taxes. Especially in the current interest rate field. I mean why spend 10-20k/year on reducing your mortgage with >1% interest rate when you could invest that in the market with a much higher expected yield?
You can pay it down completely (having no mortgage) but that makes zero sense in Switzerland.
This is exactly what confuses me, probably because I lived in countries where the idea of extinguish any debt with the bank is predominant.
Isn’t the bank still the owner of the house, in case I paid back, let´s say, 85% of the total because it owns the other 15% still?
Also this is another very good point
I mean why spend 10-20k/year on reducing your mortgage with >1% interest rate when you could invest that in the market with a much higher expected yield?
I know there are several variables in the equation here, some of them very different depending on the personal situation but, where is the thread-off between buying a house and then start investing vs keep renting and investing?
You are the owner from the beginning. It’s just that the bank has the ability to sell your house if you aren’t able to pay the interest or required amortisation anymore (because your house is pledged to the mortgage). It doesn’t matter if the mortgage is 90% or 1%. If that is annoying you, you’ll have to reduce it to 0%. But like I said, this won’t make sense.
The calculation isn’t really that simple if you are talking about the thread-off of buying or renting. It’s not only interest, you have maintenance costs too. 1-2%/year of the value of your house is a good estimate of what you should save for future renovations. And all this money including the 200k at the beginning won’t be able to compound in the stock market over several decades. The short answer: buying is more expensive longterm and you’ll end up with a lower total net worth after 20-30 years.
And just with your example above, after paying back the minimum you end up with:
rental yield (assuming the equivalent rent is 2k): 24k
interest payments: 6.66k
So assuming no increase/decrease in price, the return is ~5% (against 333k), if you add cost of maintenance, etc. that becomes likely somewhat lower. At some point you might find a better investment elsewhere.
There are still some other benefits to owning your home:
forced savings (while paying back the mortgage), many people wouldn’t save unless forced, it’s a psychological trick and one of the reason some governments like to encourage home ownership
hedge against housing price change (mostly useful once out of workforce, it protects against some type of cost of life change, might not be that useful if you’re not sure that’s the place you want to settle down long term)
Keep in mind that housing prices are volatile too. They crashed by 40% in the 90s in Switzerland. You owe the bank 800k and your house is worth 600k now, this sucks. We might see something similar if interest rates go back to historic levels (4-5%) because it’s just overblown now. But that’s just my guess.
That’s why I would always chose the indirect amortisation with the 3rd pillar (you can invest it too if you want). Let’s say you buy the house for 1 million and 10 years passed. Your mortgage is still at 800k and your 3rd pillar account (together with your wife as 6.8k/year is the maximum) is 90k. Now you can contact your client advisor and ask if it’s possible to reevaluate the value and see if further amortisations are even necessary. Let’s say the value increased to 1.3 million, now you are down to 62%. You’ll be able to free your 3rd pillar and stop any further amortisations. You basically went below the required 2/3 just by owning the house that increased in value.
Other case: A real story from 2017 at my place. Owner contacts the bank for a mortgage increase due to some inheritance issues with her sister, she needs the money to pay a lawyer because she has no cash reserves. Based on the last calculated value from 2006 her mortgage ratio was at 55%, so in theory there was no problem to increase that by 50-60k. Unfortunately after reevaluating the property value (you always have to do this if you change something substantially like increasing a mortgage) the client advisor realised that the property was nowhere near the value from 2006. Visiting the place to make sure it turned out that the house was in a pretty bad state. So the mortgage ratio was corrected close to 90%. Instead of getting the money she desperately needed she ended up getting a new amortisation requirement. I was in that meeting too, it was pretty hard. She literally broke down.
I’m still confused by the fact that by owning money to the bank, you lower your tax ratio, but at the same time they calculate the “virtual rent” of your house which might get you in a situation where the two are balanced and you might save pennies from taxes or even pay more. You can’t calculate that if you don’t know what does your city usually do to calculate the rent.
Also honestly if I have to pay 300chf more taxes to the state rather than 200chf more to a bank, I’d prefer to pay the state. Sorry bankers…
It’s funny that you concentrate on the only thing that doesn’t need an answer.
It’s just a comment to see what people think. The amount is just random.
Also you work in a bank and your opinion might be skewed.
FYI that’s how it works in most countries, either you have tax on imputed rents, or can deduct mortgage interests (never both, rarely none). Probably neither solution is perfect in terms of fiscal policy (otherwise we’d likely have converged towards one).
I think Switzerland is talking about switching to the latter now?
I strongly recommend you to watch this video. It’s packed with information, so make sure you really understand every sentence before you keep watching.
What may be missing in this video is the tax situation in Switzerland. Being able to contribute to 2/3 pillar and then unlock that money with a real estate purchase is a big factor.
But in general, this is not a trivial calculation and I don’t think the answer is a clear RENT or BUY, it really depends.
It is crucial to understand that with the current real estate prices the discussion only makes sense with a mortgage. And buying a house via mortgage is a leverage investment. You could as well go with a leveraged S&P 500 ETF and compare against that.
Not so fast. I have no mortgage. Are you saying it makes no sense? Should I sell all my ETFs and get one?
Oh yeah, that makes total sense! These bloody bankers, pure evil! And the state, such good guys.
They are dicussing to drop the whole virtual rent thing. You also couldn’t subtract interest and future renovations from your taxable income anymore. This would be great as long als interest rates stay below 2.5%.
Makes sense. I would also welcome it if they eliminated tax benefits to people owning real estate. Real estate as an asset has such a privileged status in western economies. It’s the go-to asset for all people who want to invest their savings. The majority of net worth of many people is their own flat, usually even leveraged! If they get rid of this privileged status, then the prices would definitely drop. But forget it, it won’t happen.
What are you talking about? I struggle to understand. How should I get a mortgage with no capital? The complete scenario is this: you have $200’000. Do you a) invest it in VT or b) take a 800’000 mortgage and buy a 1’000’000 flat?
And the answer is definitely not an easy one. Yes, you can get a cheap mortgage, fix it for 10 years, but how can you be sure that the $200’000 invested in VT would not make up for the difference between rent & interest? And how do you know that your flat will still be worth at least 1’000’000 in 10 years? Maybe your interest goes up, price of your flat drops, and in 10 years I swoop in and buy your flat for 800’000 with my VT earnings
Many thanks everybody for the fruitful conversation.
I was already hesitant on buying due the high costs here in CH, but your input is convincing me even more.
I strongly recommend you to watch this video. It’s packed with information, so make sure you really understand every sentence before you keep watching.
Thank you, @Bojack: even if I was more looking for something specific to Switzerland, this is anyhow a great source.
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