How do banks factor maintenance costs into their equity calculations?

The mathematics of banks: Flat fees instead of individual receipts

To understand how property maintenance costs are calculated, we need to delve deeply into affordability analysis. The bank doesn't examine your individual contractor invoices; it uses statistical data.

The 1 percent rule for calculating property maintenance costs

The gold standard in the Swiss banking sector for calculating property maintenance costs is the "1 percent rule". Banks estimate approximately 0.7% to 1.0% of the property's market value annually for ancillary costs (electricity, water, insurance) and maintenance (repairs, renovations).

• Why this value? The calculation of property maintenance is based on the assumption that a property needs to be regularly renovated throughout its life cycle (roof, heating, facade).
• The effect: For a house valued at 1 million Swiss francs, the bank includes a fixed annual maintenance cost of 10,000 francs in its calculations . This amount is added to the imputed interest (5%) and the amortization. Only if your income easily covers this sum (max. 33% of your gross salary) will you receive approval.

Differentiation in the calculation of property maintenance

Not all banks treat all properties the same. Property maintenance costs can vary depending on the type of property.

• New buildings: Some institutions apply a lower rate for calculating property maintenance costs for new buildings during the first 10 years (e.g., 0.5% or 0.6%), as warranties are in effect and everything is new. This makes it easier to manage the costs affordably.
• Older buildings: For unrenovated properties, the estimated property maintenance costs may be adjusted upwards. If a backlog of necessary investments is evident, the bank may even calculate internally at 1.2% or require that renovation costs be deducted directly from equity.
• Condominium ownership: Here, the contributions to the reserve fund are factored into the property maintenance calculation . If these are set too low, the bank often adjusts the value upwards in its internal property maintenance calculation .

Impact on equity capital requirements

How does the property maintenance calculation relate to your equity? Indirectly, but significantly. If the property maintenance calculation shows that the ancillary costs exceed your budget (affordability > 33%), you have two options:

• Earn more money (difficult in the short term).
• Take out a smaller mortgage. To lower your mortgage, you need to contribute more equity . A bank's strict calculation of property maintenance costs can mean that instead of the usual 20%, you suddenly need 25% or 30% equity to ensure the monthly payments are proportionate to your income. Property maintenance calculations are therefore often the hidden driving force behind higher equity requirements.

Ancillary vs. maintenance costs in the calculation of property maintenance

For a precise calculation of property maintenance costs, a distinction is made between two categories, even though banks often combine them:

• Operating costs (ancillary costs): These are consumption-dependent (water, heating oil/electricity, garbage collection). They represent a smaller portion of the property maintenance calculation .
• Maintenance costs: These are for preserving the value of the property (painters, gardeners, plumbers). This is the great unknown in calculating property maintenance costs . Banks know: Those who cut corners on property maintenance are living off their capital. Eventually, the hammer will fall . That's why they rarely deviate from the conservative 1% guideline in their property maintenance calculations , even if you promise to do all the repairs yourself .

The danger of underestimating property maintenance costs

Why are banks so inflexible when calculating property maintenance costs ? Many buyers paint a rosy picture of their situation. "I don't heat much" or "I don't need a gardener." But the bank has to hedge against the worst-case scenario. If energy prices rise, utility costs skyrocket. If the property maintenance calculation was too tight, the borrower will run into financial difficulties. A sound property maintenance calculation, therefore, protects you from yourself. It forces you to plan for reserves that you might not actually need for another 15 years (e.g., for a new heating system), but which are already factored into the theoretical property maintenance calculation today.

Strategies for borrowers

Is it possible to influence the calculation of property maintenance costs ?

• Energy certificate: For energy-efficiently renovated houses (Minergie), some banks are willing to negotiate and slightly reduce the amount used in the calculation of property maintenance (e.g. to 0.6% or 0.7%).
• Renewal fund: For apartments, a well-funded renewal fund is helpful. It shows the bank that provisions have already been made for property maintenance costs . However, the property maintenance cost calculation remains a fixed factor. Those who narrowly miss affordability due to the property maintenance cost calculation usually have to supplement it with equity.

Conclusion

The question "How do banks factor in maintenance costs?" reveals that real estate financing is more than just comparing interest rates. The property maintenance calculation acts as the bank's safety net. It typically allocates around 1% of the property's market value as annual costs to ensure you can afford the house in the long term.

This conservative property maintenance calculation may initially seem like a hurdle, as it increases the demands on your income or equity. However, it makes sense. A realistic property maintenance calculation prevents you from becoming "house poor "—that is, owning a large house but having no money left to live on. Accept the property maintenance calculation as a necessary stress test for your budget.

If you want to know how an energy-efficient renovation could positively affect your bank's property maintenance calculations , or whether your equity is sufficient to meet the strict affordability standards, Loft offers detailed calculation tools and neutral advice.

Glossary

• Property maintenance calculation: The calculation of the expected annual costs for the operation and maintenance of a property, which banks use to assess affordability.
• Market value: The current market value of the property. It forms the basis for the percentage calculation of property maintenance (usually 1%).
• Affordability: The ratio of total costs (interest, amortization, property maintenance calculations ) to gross income.
• Operating costs: Ongoing costs such as electricity, water and insurance, which are part of the property maintenance calculation .
• Renewal fund: Reserve account for condominium ownership. A high balance can positively influence the bank's individual calculation of property maintenance costs .