How to find out if you are solvent to purchase property in 2023?

Updated on November, 21st 2023.

Establishing your solvency will allow you to find out the maximum mortgage rate a bank will agree to finance. Easy right?

Given the fact that purchasing real estate property will in any case represent important annual costs, the bank will try to determine whether you can handle them. 

To make this calculation, it is necessary to separate the actual and theoretical costs into 3 parts: 

• The mortgage interests (what you will have to pay to a financial institution in order for it to lend you a certain amount). 
• The amortisation or reimbursement of the 2nd rank loan over 15 years or at the latest until the usual retirement age. 
• The annual maintenance costs. 

Once these 3 parts have been calculated precisely, all you have to do is add them up and you’ll find out the maximum debt you can borrow.

Part 1 : Calculation of the mortgage burden

As they are cautious, banks do not take into account the actual market interest rate (which is between 2% and 3% at the end of 2023) but a fictitious technical rate ranging between 4 and 5% depending on the financial institution. 

Why are they taking much higher rates than the reality? It is very simple, they want to make sure that if the real estate market goes sour and interest rates go off the charts, you would still have the financial capacity to pay for them. 

Example of fictitious interest charges

If my apartment is worth 770,000 CHF and that we subtract the personal funds (20%, 154,000 CHF), the bank should loan me 616,000 CHF (80%).

And let’s take a fairly strict bank that will base its rate on 5%. With a mortgage debt of 616,000 CHF at a 5% interest, it gives us 32,000 CHF per year. 

Write this number down, put it aside and let’s move on to the costs related to the amortisation.

Part 2 : Calculation of the amortisation

The mortgage loan is, in most cases, divided in two ranks. The first represents 65% of the total value of the property. The second, 15%.

The second rank (so 15% of the real estate price) must be reimbursed in 15 years or up until the day you retire, this is called the amortisation. it can be either direct or indirect. 

When calculating solvency, the value of the 2nd rank is simply :

• divided by 15 years if you are younger than 50 years old
• divided by the amount of years you have left until you retire, if you’re older than 50 years old.

In our example, the sale price is CHF 770,000 and 15% of this amount gives us CHF 115,500. This CHF 115,500 represents the part to be amortised. If, in our example, we have 35 years, then we will have to amortise this sum over 15 years, i.e. 115,500 / 15 = CHF 7,700 / year.

So, for the moment, we have CHF 32,000 in theoretical interest costs + CHF 7,700 in depreciation costs. Put these two figures to one side, stay focused, it’s nearly over.

All we have left to calculate in order to determine the total costs that the bank considers for your future purchase, is the maintenance costs. 

Part 3 : Calculation of your home maintenance costs

The maintenance costs quickly accumulate and end up weighing in the final amount. Generally, we (or should I say, the banks) consider that they yearly amount to 1% of the total price of the property. 

1% of 770’000 CHF, is 7’700 CHF.

Phew… Now, all we have left to do is finding out the price of the property the bank will accept to finance thanks to our income. 

Part 4 : Determine the salary needed to buy your principal residence

To sum up: we have, per year: 

· Mortgage burden 32’000 CHF

· Amortisation 7’700CHF

· Maintenance costs 7’700 CHF

When we add everything up, it gives us a total of 47’400 CHF.

The rule is simple: take this figure, multiply it by 3 and you’ll get the minimum income needed to buy the property.

47’400 x 3 = 142’200 CHF per year.

We therefore have to make 142’200 CHF per year for banks to agree to loan us the 616’000 CHF we need to buy our property.

Since I make 72’000 CHF per year, I was very far from the mark! My wife Zoé, makes 96’000 CHF for a year.

Even though her monthly salary is above national average, she also would not have been able to take out a loan on her own. 

But together, we make 168’000 CHF per year, which is plenty enough to reassure our banker!

In short, once the personal funds are gathered and the solvency test is passed, all you have left to do is to put your file together in order to present it to different institutions and find the best rate with the best terms. 

Be careful: in our example, our favourite couple does not have any debts or existing expenses. Every expense such as leasing, consumer credit, etc… will be taken into account in the calculation of your income and will thus drastically decrease your purchasing ability (lien vers la calculette immobilier), even if she managed to find a very good mortgage rate!