What financing risks are involved in buying a property?

The anatomy of danger: Where the financing risks of homeownership lurk

To protect yourself, you need to understand how banks think and how the market works. The financing risks of homeownership are not theoretical constructs, but real scenarios that can affect any homeowner.

Interest rate risk: The classic case

The most well-known financing risk for homeownership is the rise in mortgage interest rates.

Anyone with a SARON mortgage (money market mortgage) feels this risk immediately. If the key interest rate rises, the cost of your money increases.

• But even fixed-rate mortgages are not immune to this aspect of home financing risks . If your 10-year mortgage at 1.0% expires and the market interest rate is then at 3.5%, your costs will triple overnight.
• The danger: If your budget can't handle this jump, the property becomes unsustainable. This interest rate risk is one of the key financing risks for homeownership , and it often only manifests itself after a delay.

The risk of write-downs: The "margin call"

Less well-known, but all the more dangerous among the financing risks of home ownership , is the depreciation of the property.

Banks typically finance up to 80% of the market value. What happens if property prices fall (e.g., due to a housing bubble or rising interest rates)?

• If the value of your house drops so drastically that the loan-to-value ratio suddenly reaches 90%, you are violating the financing rules.
• The consequence: The bank can demand an extraordinary amortization (additional payment) to reduce the loan-to-value ratio back to 80%.
• If you need to inject an additional 50,000 or 100,000 Swiss francs within a short period and don't have the money, you risk foreclosure. This scenario is one of the most aggressive financing risks for homeownership in a market correction.

The affordability risk: When life gets in the way

The financing risks of homeownership often lie not in the market, but in your personal life. The bank assesses your affordability at the time of purchase. But what will happen in five years?

• Loss of income: Unemployment or disability drastically reduces income. Is the pension sufficient to cover the calculated costs? If not, affordability becomes negative.
• Divorce/separation: This is one of the most common triggers for home financing risks to materialize. Suddenly, one income (or alimony) has to finance two households. Often, this forces the sale of the jointly owned property.

These personal financing risks associated with home ownership are often underestimated, as people tend to be optimistic about the future when buying a home.

The concentration risk: Putting everything on one card

For most Swiss people, their own home is their greatest asset.

• The logic is: If 80% or 90% of your net worth is invested in a single property, you have a massive concentration risk.
• The problem: If the local real estate market performs poorly or you have construction defects, it affects your entire portfolio. You can't diversify the risk like you can with stocks. Among the financing risks of homeownership, this lack of diversification is a structural problem.

The liquidity risk: Asset rich, cash poor

Another common financing risk for homeownership is a lack of liquid funds.

You own a house worth 1.5 million, but you only have 5,000 francs in your bank account.

• If the heating system fails or the roof leaks, there is no money for the repairs.
• Since your money is tied up in real estate, you can't access it quickly. Increasing the mortgage is often difficult when affordability is tight. These financing risks associated with homeownership lead to a backlog of repairs, which in turn reduces the property's value – a vicious cycle.

The refinancing risk: The hurdle in old age

Financing risks associated with home ownership become particularly relevant for older homeowners upon retirement.

• Income is decreasing (pension is lower than wages).
• The bank will reassess your affordability. If you no longer meet the criteria with your lower pension income, the bank may refuse to extend the mortgage or require partial amortization.
• Many seniors are surprised by these financing risks of home ownership and have to sell their beloved home because they no longer meet the "theoretical" affordability criteria, even though they could pay the interest.

Strategies for minimizing financing risks for homeownership

How do you deal with these financing risks of homeownership ?

• Plan for a buffer: Don't calculate your affordability to the limit. Keep reserves available for interest rate increases.
• Amortization: Pay back debts. A lower mortgage reduces almost all of the aforementioned financing risks associated with homeownership (interest burden, loan-to-value ratio, refinancing).
• Insurance: Disability or death insurance can cushion the financial consequences of personal misfortunes and thus minimize the financing risks of home ownership .
• Maintain liquidity: Don't invest every last franc of equity in the purchase. Retain liquid funds for maintenance to reduce the liquidity risk in your home financing portfolio.

Conclusion

The question "What financing risks are involved in buying a property?" is essential for every buyer. The financing risks associated with homeownership are real and diverse. They range from interest rate fluctuations and depreciation to personal crises. Anyone who believes that signing the contract at the notary's office is the end of the story is mistaken.

Owning property requires long-term planning. Most financing risks associated with homeownership can be managed if you understand and respect them. Avoid maximum debt, set aside funds for maintenance, and regularly review your affordability – not just when buying. By actively managing the financing risks of homeownership , you transform risk into security and turn real estate into a genuine retirement plan.

If you want to simulate how much interest rate increases would affect you or whether your affordability is secured even in retirement, in order to avoid unpleasant surprises regarding the financing risks of home ownership , Loft provides neutral stress test tools and market analyses.

Glossary

• Financing risks for home ownership: The totality of all risks (market, interest rate, person) that can lead to a property no longer being financially viable or having to be foreclosed upon.
• Margin call: The bank's right to demand additional equity capital in order to restore the loan-to-value ratio when property prices fall. One of the most serious financing risks for homeownership .
• Interest rate risk: The danger that rising market interest rates will increase monthly housing costs so significantly that the owner's budget is overstretched. A key aspect of home financing risks .
• Concentration risk: The concentration of assets on a single property. If this property loses value, the financing risks associated with homeownership are enormous for the overall assets.
• Affordability: The ratio of costs to income. A deterioration of this ratio (e.g., due to divorce or retirement) is a common trigger for financing risks in homeownership .