Why would an interest increase of 3% jeopardize so many real estate loans?

Yeah but there is also value in owning something that can’t be measured in CHF. I think it’s fine to pay a premium for that.

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We frequently ask ourselves the same - whether to just screw it and buy for “enjoyment” reasons

The problem is that the properties around here just cost obscene amounts of money, eggs in one basket stuff. At the end of the day they are not a big improvement on our current rental. Let’s see what happens

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Just one datapoint, but the deemed rental value of my house in Zurich is much smaller than the market rent, i.e., 14K for a house which would rent for 40-45K/year.

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Same for us, also Zurich, 11.5K for a house that would rent out 35-40K/year.

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I believe Geneva is an exception vs most of the rest of Switzerland. Property Value for wealth tax = purchase price and taxable rent =~ market rent, or slightly below (you complete a questionnaire to determine rental value)

Geneva also has purchase taxes ("notaire taxes) that are about 6% of the property value

Our new apartment in AG has a rental value of 16.5k (880k market value, 770k buying price) and I could rent it out for 2.2k/month net or 2.45k/month gross.

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Should we not assume rent increase as well? if there is to be a 3% interest there for 10 years, then at minimum there should be 2-2,5% rent inflation

From my experience rents don’t increase in parallel with mortgage rates.

You can only increase/decrease rent when the reference interest rate changes. Currently it is at 1.25% and did not change since March 2020.

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I guess that only applies to existing contracts.

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But, will that not raise automatically with increasing interest rates?

I thought it was calculated, at least in part, based on mortgage rates?

It’s calculated based on the average mortgage rates of all banks. It increases as well, but it’s lagging and I assume the average includes existing and new rates, otherwise I can’t explain why it was unchanged for 2 years, while mortgage rates were decreasing in the same time.

Here’s more info and also the history of the rate:

I think you clearly have to add the opportunity costs for the 400k.
Even when I consider that it would come half/half out of pension and saved assets, this would at least mean 1k CHF/m on average.

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So the SNB hiked the reference rate by 50 basis points. 10 year fixed rate is over 3 percent as per Raiffeisen.

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Saron increase to come soon?

The SNB has added some pretty clear statements in their latest stability report.

https://www.bloomberg.com/news/articles/2022-06-16/swiss-real-estate-risk-rising-correction-more-likely-snb-says

“For the residential real estate segments, a broad set of indicators currently points to stretched valuations, implying an elevated risk of corrections. Uncertainty regarding the appropriate valuation level of real estate is high, however.
For the apartment segment, for example, simple valuation metrics, such as price-to-rent and price-to-GDP ratios, have reached levels that are about 30 – 35% above their historical averages”

To me, it looks like the SNB is saying that a correction in the real estate market that reaches the levels of 90s crisis is not off the table. As a recent buyer, this is super scary…

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I’m a bit scared too. My wife and I bought a house 2 years ago with 80% leverage. We’re currently refurbishing it and paying these costs out of our equity. This should increase the value and hence reduce the loan-to-value.

Once the refurbishment is complete (should take another two months) I’ll ask my bank to revalue the house. In a down cycle, I don’t want to be red flagged…

Has anyone gone through such a reevaluation process and can share some insights?

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Keep in mind if rates stay more “normal” and prices look like they’ll go down 30% we can speculate that SNB may relax the requirement to amortise to 67% in 15 years. Monthly payments to the bank may be about the same as a result (higher interest but lower amortisation)

Remember SNB introduced the 15 year rule because they couldn’t use their usual approach of increasing rates to cool the market

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Thanks for your answer, wasn’t aware of the possible reaction of the SNB.

I’m not worried about the amortisation part though. I just don’t want to pop up with a red flag when the bank conducts a stress test or if the market actually crashes.
Currently, if the market goes down 20%, the house would be 100% levered. For the bank, the underlying security would be gone…
I’ll therefore ask the bank to re-estimate the market value after the refurbishment in order to reduce the LTV.

I’ll keep you posted once I’ve gone through the process. If anybody has done the same already, I’d be interested to get some insight!

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I would never do that. What if they ask you to bring in the 20% cash right now or they are going to force-sell it?