FI with mortgage? Conditions for bank lending for clients without salary

Dear Swiss FI community, we’re still living abroad and have slowly accumulated sufficient wealth to call it a day.
Now, the essence of my question is that in Switzerland it’s common to have a mortgage on your home for tax deductibles and other reasons (cheap financing cost, tax benefits, gearing on your overall assets).

In case I’d retire and no longer rely on a job, which institute would still give us a mortgage (under what conditions, possible without a stable payslip, how much assets to be banked with that institute, other conditions they might consider)? This question is quite crucial as it will determine how much investable assets we can keep on the side working for us while making the move.

Case study:
Home bought with mortgage in Switzerland, home value 100%, outstanding mortgage 60% of the value
Bankable assets: up to 170% [independently of the above mortgage] could be concentrated at one institute (currently the amount is home equity in two other properties abroad and two investment accounts with banks)
Total net worth 210%

If not possible to keep a mortgage, the alternative would be to pay-off the mortgage and reduce our investable asset pot or take a loan against the bankable assets (which is increasing risk again). But we would like to keep a healthy gearing in the total situation using the home as pledge-able asset.

Happy for any input, preferably in case someone has done it themselves already.

Cheers!
A fellow Mustachian

That’s for an interesting question!

I asked a similar question to a financial advisor when I was about to sign my mortgage and here is what he mentioned: with your FI plan to retire in 11 years, you could take a 10y fix-rate mortgage, then renew it for 10y while you still have a job. And then, as long as you pay interests they shouldn’t ask you about status changes*.
As we plan to potentially live abroad in 15-20y, this could work out — as we would sell our home then.

To come back to your case, I would myself follow one of these two options: a/ ask a bank very transparently, with your numbers and arguments, or b/ check with an independent financial advisor such as VZ or D-L.

Please let us know about the outcome of such discussions as this will serve any FI at some point when the d-day approaches :wink:

Cheers,
MP

  • contractually you got to inform them about such changes afaik
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Thanks MP! Just fixed my mortgage on 3 months LIBOR basis today and will arrange for some meetings with other bankers when in town later this year. Fixing for 10 years would be a good move eventually. Will evaluate several options and shall revert once smarter! Cheers

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Had a couple of meetings this week with local banks to explore my idea and would like to share my latest findings first, though, still exploring. Let’s assume base case of someone planning to go financially independent, but planning to keep a mortgage. Some banks out there can’t or don’t feel like granting a mortgage to someone without the traditional “stable paycheck proof”. However, I happen to find a bank which could consider the following solution:

Example:

  • house value CHF 1 mio
  • planned mortgage CHF 500k
  • using a [calculatory] 5% interest rate, interest rate “burden” could amount to CHF 25k per year
  • 1% of the house value for maintenance to be factored in: CHF 10k per year
  • housing costs [expected] would total at CHF 35k per year
  • bank needs this housing cost to be within 33% of income, e.g. income to be around CHF 100k per year to allow mortgage
  • depending on the bank, a portfolio placed with bank could be accepted as source of income as well, assuming a 5% performance could be achieved: hence a CHF 2 mio portfolio would be required, using 5% performance would equal CHF 100k income per year

I’m still exploring other ways, such as taking a CHF 500k loan against a CHF 2mio portfolio for instance [pledging the portfolio instead of the house] - however, interest rates would be somewhat higher and I still would like to pledge the home as it grants the long term stability. The key risk would be if the banks rules change or in case portfolio might suddenly take a hit.

Cheers,
FI

That is indeed interesting. And the reasoning sounds somewhat legit.

this could be ambitious, no?

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Dear Nugget, backbone of such a portfolio would be PIMCO Income (unconstrained fixed income fund, CHF hedged, payout around 4% p.a. with monthly payments), Invesco US Senior Loans (short duration [60 days], payout linked to short term interest rates, spread about 450bps, CHF hedged, payout around 5.50% p.a. with monthly payments) as well as some Catastrophy Bond Funds (Schroders, GAM or LGT, with no correlation to the traditional investment world),
Income streams from these sources can then be used to slowly pay-off mortgage, reinvest into equities on a regular basis and use for daily life. 5% is quite feasible. Just need to look in the more unconstrained fixed income space and CHF hedged share classes in order to keep it in home currency.

Hm I was not aware of that. but… i struggle believing in a risk free 5% p.a. investment? my risk-free niveau is somewhere between 0 and 0.5% here in switzerland. i might look into this the next days :slight_smile:

Dear Nugget, for risk-free you will only be able to get risk-free interest rate indeed. Fixed income can be the kind of AAA risk-free space (which I strongly dislike as we all expect interest rates to slowly climb up), but it can go down to “junk bonds” (or high yield) as well as beyond - this is the dimension of issuer risk only. Other dimensions are the duration, the characteristics (fixed vs. floating rates) or more non-traditional fixed income space (mortgage investing, catastrophe bonds). It’s not so much about avoiding risk if you put money into fixed income, it’s more about reducing volatility from an otherwise equity only portfolio but in a smart way.

Example PIMCO Income
[I’m not getting paid to promote this here, but feel it elaborates the point by having a concrete example]:

  • see dividend yield
  • see performance 2008 (-5.46%), the worst year
  • see sector allocation/ duration (payouts on floating rate mortgage investments will increase as interest rates increase)
  • it’s available completely hedged in CHF

So, yeah, no risk free, but much less volatile for sure. Some banks offer lending value of 90% on the above fund by the way (better than your own home)!

Here some background on the Invesco US Senior Loan fund (CHF hedged available as well):
https://www.bloomberg.com/quote/XPRTX:US

  • as duration is 60 days max this one, paying a spread of 450bps over risk-free rate, is bound to adjust to the upside as interest rates go higher and it will not get hit by an upward shift of the interest rate curve

Expense ratios/ fees: yes, they don’t come for free - and maybe they are not the traditional mustachian way of investing for that very reason. But I feel they are interesting enough as the plain vanilla fixed income ETF is bound to suffer as interest rates move higher.

Cheers,
FI

I can agree that going the path of income is about reducing volatility.

But many of us are in the accumulation phase, where volatility is your best friend.

back in topic: I think buying a home must be done while working and showing the paycheck. Then wait some time and retire. They will not care where the money comes from, as long as you pay the interests.

Sure, but don’t forget about the renewal of mortgages. As far as I know they will check again whether you earn enough or not. It may be that it depends on the bank. I will see that in 10 years.

I would be happy to have info about that.

When you order a credit card, the bank checks at the beginning and renew automatically without any new checkings.
In some cases, ifyou would like to increase your limit, they ask to have income statement.

Anybody with first-hand experience of what happens when a mortgage runs out?

In my case, I might want to call FIRE and leave CH a few years before my mortgage ends, planning to rent out the house in the meantime. Trying to understand what will/might happen once the mortgage is up when I:

  • wouldn’t want to sell
  • cannot show a pay check covering the required constraints

What if I show a rental contract where I get ~5% of the outstanding loan? Would any bank accept that?

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Dear @Giff, best to have a good banking relationship, knowing your banker personally and him knowing you as good as possible will open all doors. Alternatively, if mortgage runs out, bank may or may not be asking you for all sustaining documents to renew (depending on your standing with them), worst case you just pay it off and go to another bank, best your bank where you keep the rest of your assets invested, to get a bundle solution. Or you have unmortgaged property that you can offer ANY bank as a great conversation starter.

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Probably. I talked to a bank this year (Raiffeisen) about buying a rental property. They required 25% equity and rental coverage of 5% of the borrowed amount. It is possible they also required another 1% of property value for maintenance cost, but I honestly can’t remember.

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Talked to Migrosbank about this, being FIRE having enough cash but no contractual income. When I remember correctly they will calculate the wealth as 9% income. Meaning having 1mio wealth, would create 90k year virtual salary, they calculate with. Hope this helps.

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I guess they would want to manage all your wealth, then?

When I talked to my UBS advisor about minimising my downpayment and maximising the mortgage, first it got him out of his comfort zone. Eventually he checked and said they may be able to consider 2-3% of invested assets as income for affordability calculations. At the time I thought this made sense since it is close to the common interprtation of the Safe Withdrawal Rate. Can’t recall for certain if it had to be invested with them, but I think not

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How much % of your liquid assets will be considered as income varies from bank to bank. They also take your age into account.

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Seems like my plan is feasible, I might only have to go talk to a few banks to get the best deal. Thanks.

Are 2nd and 3rd pillar normally considered as liquid?

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