Paying off your mortgage? Real estate affordability

Videos, Wealth & Pension Planning Updated at 14.07.2022
Originally published at 27.09.2021 Reading time: 2 minute(s)

As mortgage interest rates are on the rise again, one age-old question is becoming increasingly urgent: What is the best mortgage for your home? If it’s too high, it may be difficult to finance it after retirement. If it’s too low, a lot of cash is tied up, causing taxation to increase unnecessarily. © Video: Vontobel

As the owner of a property you live in, one question will arise at some point: Can I afford my mortgage long term? Even after I retire? Find helpful guidelines to determine the best mortgage level for you.

How much of my mortgage should I pay off?

As retirement draws nearer, a number of things in life will change – including finances. New OASI and pension fund income is around 30 to 40 percent lower than the previous salary. Does that mean you have to tighten your purse strings to cover the fixed costs of your home in the long term? The good news first: There are some interesting optimization options for fixed costs.

What does “fixed costs” mean?

All properties involve fixed costs. These include:

Mortgage interest
Costs involved in paying off your mortgage
Incidental expenses

The following benchmark can be used: These fixed costs should not total more than one third of your gross income.

To this day, many financial institutions use an imputed interest rate of five percent per year, even though actual interest rates are lower. The purpose of this is also to give you security – so you can better cope with any increase in interest rates. Incidental expenses are usually calculated on top of this as one percent of the property value.

Affordability is calculated as a ratio of income to fixed costs. The following tips provide an overview of how home ownership can be financed long term:

4 tips for a mortgage in old age:

Reduce your mortgage by the time you retire

As a rule of thumb: Pay off a third of the property’s value by the time you retire. This reduces your obligations to the bank to two-thirds of the value. In our experience, this “security” will mean you can stop making regular repayment installments. Your financial institution’s credit regulations determine whether or not you can do this.
Don’t pay off your entire mortgage

Your mortgage shouldn’t be too high or too low. For example, if you pay off your entire mortgage, you’re tying up a lot of capital. This could deplete your reserves and have double the negative impact on your return on investment. Firstly, because less capital is available to invest in things like securities, for example. And secondly, because you will be able to claim less debt and debt interest on your tax return.
Grow your pension

You can build up capital via the 2nd pillar (occupational pension) or via pillar 3a. As an example, this includes voluntary pension payments. You can use this capital to pay off your mortgage later – either when you retire or even earlier.

Important in this context: Not all pension funds allow you to withdraw all your retirement savings as a lump sum. Find out which rules apply to you first. Many funds now allow you to withdraw half of your pension or even your entire pension as a lump sum.
Consider selling your property

Do you want to give your property to your children? Or do you want to sell your property? Maybe in order to buy another one? The latter scenario is interesting because you may benefit from a property gains tax deferral.

We would be happy to advise you

Real estate issues are complex. It’s best to get comprehensive advice early on. We would be happy to review your individual situation and give you a non-binding assessment.

Our mortgage services

We always consider real estate and mortgage issues in the overall context of your financial planning. This also means that we plan for any impact on your taxes and advise you on how to protect yourself against any risks. What happens to your property in the event of death or disability? Please feel free to contact us for a non-binding initial consultation.