A discussion has broken out in BETTERHOMES-Town: All the newspapers say that due to the current historically low interest rates, investing in your own home and thus buying is much more attractive and cheaper than renting. Is this true?
Do you really fare so much worse as a renter than as a buyer at the moment? And are the low mortgage rates really a cheap ticket to home ownership??
Switzerland is considered the classic renter's country, with more than half of the population living for rent. This is despite the fact that mortgage interest rates are historically low at the moment. One thing is certain: buying has not been as cheap as it is now for a long time. Then why doesn't everyone buy?
Real is not always relevant
Quite simply, it's not just the effective affordability that counts, but also the imputed affordability. Lenders want to hedge their bets should interest rates leave record lows and rise again. Because even if there's no end in sight to low mortgage rates at the moment, they won't last forever, and lenders want to make sure that a potential rise in rates doesn't trigger massive payment problems for borrowers.
So if a hypothetical scenario is calculated where interest rates are higher, the financing potential of many suddenly no longer looks so rosy. Real low interest rates or not – what often counts is the imputed interest rate.
What is the imputed interest rate?
The imputed interest rate is used in lending to calculate affordability in order to ensure financing on the part of customers even in future high-interest periods.
According to the mortgage broker Moneypark, many financing institutions most often reject mortgage applications due to lack of affordability. Lack of equity is the reason for rejection in only about ten percent of all cases. According to calculations by Moneypark, real estate in Switzerland was financed with an average of only 26% equity in 2018 – the remaining percentages were borrowed. In the event of a housing market collapse, it's that equity that will be lost – and need to be paid back. So if real estate prices were to collapse in a crash, many homeowners would have lost all their equity. In very many cases, it is hardly possible to pay the same in arrears, which would inevitably bankrupt them.
So can you forget about home ownership?
The imputed interest rate of five percent is not based on any regulations, which is why different institutions can set different imputed interest rates. This is exactly why it is worth comparing different providers. In addition, financing partners need to be flexible in order to attract new customers.
Of course, financing and one's own financial situation are not the only deciding factors in deciding for or against owning one's own four walls. Many other factors play an important role.
A fixed mortgage interest rate offers protection against inflation and, in the current interest rate situation, low housing costs at the same time. Of course, a mortgage cannot be concluded for an indefinite period of time, which is why an increase in interest rates is to be expected from the time the mortgage is extended – in this regard, the "worst case scenario" should always be considered in order to be prepared for any eventuality. With regard to taxes, home ownership is a double-edged sword: Although you can deduct any alterations and renovations from your taxes, you have to pay tax on the imputed rental value as income.
For many people who are thinking about buying their own home, "old-age provision" is an important keyword. Real estate is considered a stable and safe investment. But of course, there are a number of things that need to be considered: In sought-after regions, you can definitely expect an increase in the value of the property, but this is far from being the case everywhere. In addition, aspects such as depreciation due to age (approx. 1% per year) and inflation must be taken into account. Furthermore, it is important to note that when buying a property can quickly incur high additional costs; for example, major renovations. On the whole, it can be said that a property – if it is paid off at retirement age – represents a good and stable retirement provision.
For many people who invest in a home, a large part of their equity is in it. The equity capital – i.e. savings, securities such as shares, gifts or loans – must be taken into account. Inheritance preference as well as assets from the pillar 3a – is thus tied. There is a major cluster risk: If mortgage interest rates rise or there is even a real estate crash, you may lose all of your equity. At this point, the opportunity costs have to be considered urgently: If you invest your equity in a different way – for example, in gold or securities – you do not take on a cluster risk and have freer access to your equity.
Financing options, tax factors and opportunity costs are aspects that must be considered in any case. When considering buying a home, however, there are many other issues at play. Compared to a rental property, a home of one's own is not dependent on a landlord who makes specifications – freedom of design and also conversion options according to one's own taste can often be undertaken without hesitation. Another tempting aspect of owning your own home is, of course, that you are not exposed to the risk of cancellation or having to comply with annoying house rules.
Despite all these positive aspects, however, the bondage to a location must also be taken into account: Once you have decided to buy your own home, it is not so easy to give it up again. In case of a new job, unemployment or divorce, the process of selling can be very lengthy. If you live in a rented property and, for example, take a new job in another city or your standard of living changes, you can easily and relatively uncomplicatedly terminate the rental relationship.
But now: Buy or rent?
Various factors can tip the scales when deciding whether to buy or rent: whether personal plans for the future, one's own financial situation, the level of rent and purchase price in the desired location and the assessment and expectation with regard to future interest rate and value development – all of this should be carefully scrutinized. Only when all factors have been carefully weighed up and examined should a decision be made. But one thing is certain: buying or renting is always an emotional decision – facts or no facts.