How do I calculate the financial affordability of buying a home?

The anatomy of the carrying capacity calculation

To properly understand home affordability , we need to delve deep into the banks' calculations. This isn't about your actual expenses next month, but rather about theoretical safety margins.

The golden rule: The rule of thirds

The key measure for home affordability is the so-called one-third rule. It states that total imputed housing costs must not exceed one-third (33%) of your gross household income.

Why is this limit for home affordability so important? The bank assumes that you need the remaining two-thirds of your income to cover taxes, health insurance, food, and transportation. If housing costs exceed this 33 percent mark, home affordability is considered not given, and the loan application will be rejected – even if you have substantial savings.

The calculated housing costs consist of three components:

• The imputed interest rate.
• Amortization.
• The incidental and maintenance costs.

The imputed interest rate: The stress test

This is where most people make a mistake. Even if you can get a fixed-rate mortgage for 1.8% today, the bank does n't use this rate when calculating home affordability .

ensure the long-term affordability of home ownership , almost all Swiss banks apply a calculated interest rate of 5% (sometimes 4.5%).

This means the bank checks whether homeownership remains affordable even if interest rates were to rise to historically high levels . This safety mechanism protects you from having to sell your house if interest rates increase. For the homeownership affordability calculation , this effectively triples the interest burden on paper compared to reality.

Amortization and incidental costs

The second aspect of home affordability is debt repayment. The so-called second mortgage (the portion of the loan exceeding 65% of the property value) must be repaid within 15 years or by retirement.

• For the affordability of home ownership, a flat rate of approximately 1% of the mortgage amount per year is usually factored in as amortization.

The third category is the ancillary costs. Heating, water, electricity, and reserves for repairs must also be paid from wages.

• To assess home affordability, banks typically calculate a monthly mortgage payment of 1% of the property's market value. For older properties or condominiums with high utility costs, this figure can be higher (e.g., 0.7% to 1.2%).

The example calculation: The million mark

Let's explore the affordability of homeownership using a concrete example.

• Purchase price of property: CHF 1,000,000
• Equity: CHF 200,000 (20%)
• Mortgage: CHF 800,000 (80%)

What is the affordability of home ownership ?

• Imputed interest:

800,000 CHF × 5% = 40,000 CHF per year.

• Amortization:

800,000 CHF × 1% = 8,000 CHF per year.

• Extra costs:

1,000,000 CHF × 1% = 10,000 CHF per year.

Total calculated costs: CHF 58,000 per year.

Now we apply the one-third rule for home affordability . This CHF 58,000 must not exceed 33% of your income.

• Invoice: 58,000 CHF ÷ 0.33 = 175,757 CHF .

Conclusion of the example: To meet the affordability criteria for a house worth one million Swiss francs with minimal equity, your household needs a gross annual income of approximately 176,000 Swiss francs . If you earn less, homeownership is not affordable according to bank regulations.

Influencing factors and optimization of wearability

What can you do if homeownership is just barely out of reach? There are options.

• More equity: Increasing your equity lowers your mortgage. This reduces the imputed interest and often also the amortization period. This significantly improves the affordability of homeownership .
• Check your income: For assessing home affordability, the 13th-month salary or bonuses (if they are regular) are often taken into account. For married couples, both incomes are added together, which makes it easier to determine home affordability (joint and several liability).
• Other obligations: Do you have any leases or small loans? These are deducted from your income and worsen home affordability . Terminating a lease can save your home affordability .

It's important to understand that home affordability isn't a form of harassment. It's a protective mechanism. Those who barely manage to meet the affordability requirements are putting themselves at risk.

Conclusion

The question "How do I calculate financial affordability?" is the crux of every real estate financing. Homeownership affordability is based on a conservative safety calculation used by banks: 5% imputed interest, 1% amortization, and 1% closing costs. In total, these costs must not exceed one-third of your gross income.

Don't underestimate this hurdle. Many dreams fail not because of the purchase price, but because of the rigorous calculation of home affordability . Use online calculators, but don't rely on enticing low-interest offers. Always calculate with 5% to be on the safe side. Only those who realistically assess home affordability can live worry-free in their own home in the long term.

If you want to know how different equity scenarios affect your home affordability or which banks offer more flexible models, Loft offers comprehensive calculation tools and neutral market comparisons to help you plan your financing.

Glossary

• Home affordability: The ratio between the ongoing costs of a property (interest, amortization, maintenance) and the buyer's gross income. These costs are usually limited to a maximum of 33% of income.
• Imputed interest rate: A fictitious interest rate (usually 5%) that banks use to calculate home affordability in order to simulate interest rate increases, independent of the current market interest rate.
• Amortization: The regular repayment of the mortgage debt. It is an integral part of the cost calculation for home affordability .
• Gross household income: The sum of all income (before taxes) of all borrowers. It forms the basis for calculating the 33% affordability threshold for homeownership .
• Loan-to-value ratio: The ratio of the mortgage to the market value of the property (max. 80%). It influences the mortgage amount and thus directly the affordability of homeownership .