You’re right! So you would either need to:
- find some extra real estate collateral in the value of 300k (since the bank only considers 80% of real estate value)
- or you need to pay off 240k of your loan to get your LTV under 80%.
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Scary, but the calculation is correct
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The bank can pledge the 3a (if you have enough money) or the 2a (I’m not 100% sure about this one)
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For me, it is crazy that the properties 2.X goes so fast. and if you look the market for 1.5 till 2 they are gone in a day.
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Question: if you’ve invested all your savings, 2nd pillar and 3rd pillar into real estate and the bank wants money (due to insufficient coverage), what would normally be the solution there? Can the bank seize your property? Are you then relieved off your loan obligation? (then you just lose your deposit, in this case 200k). Or can the bank renegotiate the conditions of your loan, so that your LTV remains > 100%, but you pay higher interest until you can save up enough money?
I won’t do that 
I agree with this sentiment. There is a trade off between having the benefit of owning your own property vs using the deposit to invest in something else likely to give a better return. The impact is to change the date you reach your FI number. My wife and I modelled 2 different scenarios buy vs rent, with 2M+ house prices we agreed the potential impact on FI was too high
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It is probably quite difficult to get accurate data for Switzerland as most towns have quite a bit of dense housing.
True for FIRE.
In addition you can potentially have the issue of renewing the mortgage if you don’t work. Similar to the retirement topic.
I see a potential problem for FI also with a collapse of the stock market. Not sure how can be the mindset if you need to find a job when you are 50.
I think this is slightly less of an issue in Switzerland versus USA as here taxes are managed at commune (gemeinde) level. For example in a rural commune with mainly houses, the commune has to pay for the drains and communal roads which I believe come out of communal tax (although I assume there will be a degree of recharging between Canton / Federation too)
Some questions regarding the situation of house prices going down causing mortgages to be higher than 80% of their value:
- How aggressive do you think banks will be with (or maybe already were in 90s) if such things happen (assuming that the mortgage is always being paid on time)?
- What would be the ratio triggering banks to behave more aggressive? 80%? 75%? 70%? etc.
- Do you think that “normal” bank’s behaviour vs. cantonal banks (that should serve the people from the canton…) may be different?
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Hence the need to know the SWR (safe withdrawal rate) discussed elsewhere on the forum.
Historical Long term return on stocks is 6-8%. Safe SWR is 3-4% to account for stock market collapses. I’m budgeting for 3%
@Bojack
@baldur
I have first hand experience and know what happened in the 90s from colleagues. Will get into it later, my afternoon today is extremely busy.
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I did, but I didn’t have enough money to withdraw pillar 2,3 so I pledge them.
After having the experience on being there, not sure if I would like to be there again.
I assume the risk knowing the risk and at that time, even if I dump all.
- I was saving up to 10k a month so in a couple of months I was able to raise a small emergency fun
- we can sustain our livewith our lowest salary we can sustain our live.
- clear goal to save at least the total cost of the mortgage.
at that time there weren’t regulation at all. I think that can save a bit the situation.
@Bojack could you please explain the relationship between interest rate and property valuation?
I have a 10 year mortgage on .9M property at .87 %. If the rate becomes say 3 percent, how does that impact valuation?
It will affect supply & demand. Higher supply, because some people can’t afford their mortgages and want to sell. Lower demand, because fewer people will want to take higher interest loans.
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Thank you for the explanation. Banks also use some datasets / quantitative criteria which guides the valuation. I wonder how soon this database gets updated with latest supply and demand based market data.
Let me try. If you have an 80% mortgage your monthly interest cost would be CHF 522 per month.
If you try to sell for 0.9M when the interest rate is 3%, the monthly interest cost for the next buyer would be 1800 CHF per month.
I do not know what the property could be rented for but 2.5% of current property value seems to be common which would be 1875 CHF per month.
Under that scenario the “cheaper to buy vs rent” equation looks quite different which is likely to put downward pressure on the price.
It seems rents are currently going down since low interest rates is causing an increase in supply of rental properties. If rates go up it could be those investors sell their properties due to rent being < interest rate, increasing supply of properties for sale and lowering price further => vicious cycle
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The 1987 stock market crash resulted in an insecurity of many investors which lead them to investing more in the real estate market. Real estate prices doubled from 1980-1990 in that process, mortgages increased by 170% in that decade. Banks supported the trend with lower interest rates. The real estate market is entering full bubble mode. In 1989 constructions of buildings and houses made up ~15% of Switzerlands GDP. Nobody was worried because this time it’s different due to low availability of land and immigration (spoiler: this time wasn’t different either, it never is).
SNB finally realized that it’s not sustainable anymore. They increased the interest rate from 3.5% to 6.0%. The Swiss government introduced new regulations to help damping the increase of real estate prices. It’s too much, interest rates went up to 8-9% in 1991. The real estate market crashed. Single family houses and single apartments by 30-40%, living and working buildings by 50%. The SNB couldn’t do anything as inflation was around 5%. People and companies can’t afford it anymore, they were forced to sell…the market was flooded.
At that time Basel I was in place. So by regulations a bank was (and still is btw with Basel II, will increase to 12% with Basel III) to cover all loans with 8% in own capital (weighted by risk/rating factors). For houses/apartments with a lend-to-value ratio below 66.6% it’s 35% (so 2.8%), for LTV ratio between 66.6-80% it’s 50% (4.0%), for anything above 80% it’s 100% (8.0%). As house prices crashed substanitally, many mortgages went up from below 2/3 to above 80%. Own capital requirements exploded from 2.8% to 8.0%. Approx. 1/3 of all Swiss banks went bankrupt in the following years. People lost their homes and all their cash on the accounts and were left with nothing.
If your bank and you were still around, they left you with only one option: You needed to amortize the mortgage as much as you could. It was a very rough time for house owners. Not only did you have to pay a big amount for interest, you were forced to increase your amortization from 1%/year to 2-4%/year. Many people couldn’t afford it anymore and they were forced to sell the house below their current mortgage amount. 42 billion CHF of mortgages were written off in total (10% of the GDP back then).
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