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 costs related to the purchase in three parts:
- The mortgage burden (the reimbursement of the rate on the loan).
- The amortisation over 15 years or at the latest until the usual retirement age.
- The maintenance costs.
Calculating ones solvency: the mortgage burden
As they are cautious, banks do not take into account the actual interest rate (which is currently between one and 2%) but a technical rate ranging between 4 and 5%.
Why do they do this? 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 be capable of paying them.
If my apartment is worth 770,000 CHF and that we subtract the personal funds (154,000 CHF), the bank should loan me 616,000 CHF.
616,000 CHF at a 5% interest, gives us 32,000 CHF per year.
Let’s move on to the costs related to the amortisation.
Calculating one’s solvency: the amortisation
The mortgage loan is divided in two ranks. The first represents 65% of the total value of the property. The second, 15%.
The second rank 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 rank is simply divided by 15 years if you are younger than 50 years old or by the amount of years you have left until you retire.
The15% of 770’000 CHF, is 115’500 CHF. Ans115’500 CHF divided by 15, gives us 7’700 CHF.
So for now, we have 32’000 CHF + 7’700 CHF in annual costs related to housing (stay focused, it is almost finished!)
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.
Calculating one’s solvency: the 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 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.
Calculating one’s solvency: the final calculation
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.
find out the minimal amount of the necessary annual income to take out a loan, we just have to multiply our results by three.
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!