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Is now a good time to purchase a home?

Updated: Dec 29, 2022


Last weekend a friends couple came over to discuss a real estate opportunity. It came as a surprise when I was asked to look into the details of a home listing that a colleague of my husband was looking at. They knew we had gone through this process a couple of times and that I closely follow the topic and I was honored for the vote of trust being asked for advice.


Although they have property back in their home country they were extremely careful and a bit hesitant to take the leap and purchase a home in Switzerland. Why?


Switzerland's housing market is extremely expensive

Although Switzerland has a very good standard of living, only around 40% of the Swiss residents own their homes. This is one of the lowest rates for self occupied homes in the world and particularly Europe because of high prices among others.


Interest rates are increasing

Just some days ago, the Swiss National Bank increased the interest rate for the first time in 15 years by 0.50% in the hopes to handle the inflationary pressure in the Swiss economy as seen very prominently in other countries.


What does that mean for the household and personal finances?

The most significant impact this measure has is the increase of interest rates in mortgages. Even though we might be talking sometimes about less than 1%, which in other context might not be as significant, we are talking here about mortgages of over half a million Swiss francs, which would incur into additional 5.000 CHF per year in mortgage interest alone or over 415 CHF in excess monthly.


Requirements for purchasing your own home:

  • Housing expenses, including mortgage and utilities, should not above 30% or your monthly income

  • The financial viability to be subject to a mortgage requires that the above mentioned criteria is fulfilled at a hypothetical 5% interest rate

  • A down payment of 20% is required

  • Up to 10% of the down payment can be taken from the second pillar pension fund - either by withdrawal or using as collateral


Adding to the uncertainty

In addition to the uncertainty about interest rates for the mortgage there are some other elements that add up. The apartment, although it seemed to be fairly priced and it is in a very good location, requires renovations. At the moment many suppliers and contractors have been facing supply issues since the aftermath of COVID measures. Estimating the renovations poses an additional challenge and risk that the costs end up being pushed up due to unexpected expenses.

The economic challenges faced at the moment bring along an additional level of uncertainty that should be considered, for example a job loss.


Other concerns discussed revolved about the impact a withdrawal from the pension fund could potentially have in the insurance policies for death and invalidity as well as the comparison of the options where 10% would get pledged instead of withdraw.



Conclusion

After a couple of hours of discussion my main conclusions are the following:

  • It is crucial to plan with a small buffer in case of something unexpected. You do not have to purchase the most expensive home you "could" afford.

  • Check the impact of a withdrawal from the pension fund, sometimes the invalidity and survivors benefits may not get affected as they get calculated from the income and not the balance. This is however dependent on the pension fund regulations so I encourage you to ask directly on a case by case basis.

  • In most cases, withdrawing the funds result in the most favorable financial situation for a lower monthly cashflow. Please bare in mind that no voluntary purchases towards closing the gap in the pension fund can be made until the withdraw amount is paid back.

  • Finally, the decision in the end is a very personal one. The most prominent factors that play a role are emotions, fears and expectations and it is important to acknowledge them and consider them all. In this case our friends were not ecstatic about the apartment distribution, they would need to extend the kitchen and would have to sacrifice a big terrace they currently have in their rented apartment. Although they do not have to be absolute deal breakers, it is important to think through and assess if the trade off is worth it for them.

  • The interest rates were the biggest concern for the decision and although it is a very important factor to consider as well, my opinion is that the purchase cannot be made under the premise of a future behavior of interest rates. It is very likely that interest rates will go up and down during the next 30-40-50 years they will own that home and the last thing you want is to regret the decision should the interest rates change in the wrong direction one time.

So my advice is first you have to decide that you actually can see yourself living in that property for the foreseeable future. Then work through the numbers and calculations to make sure you can afford it. And finally compare the scenario with your opportunity cost and other alternatives you may have to make sure this is the option you want to choose.


Time is of essence when closing a deal but do not let yourself be pressured into a decision you are not ready to make.


I look forward to finding out what they decided.



Would you consider to buy a home now?

  • 0%Yes, as soon as I have the financial resources!

  • 0%No way, I will wait until the interest rates go down again





Is there anything else you would add? Let me know in the comments!



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