Mortgages
Mortgage affordability: how the bank really calculates
Many people find out too late an uncomfortable truth: what they can afford isn't what the bank approves. The reason lies in how affordability is calculated — and it almost always revolves around one disconcerting number.
The 33% rule
To grant a mortgage, the bank checks that the annual housing costs don't exceed roughly one third (33%) of your gross income. Sounds simple. The catch is what goes into those «annual costs»: not just interest, but also maintenance and amortization. And the interest isn't calculated at the rate you actually pay.
The disconcerting number: the theoretical rate
The bank doesn't use today's market rate. It calculates interest at a theoretical rate, usually around 5%, to make sure you could carry the loan even if rates rose. It's a safeguard — for you and the bank — but it's also why a property that's perfectly affordable at today's rates can fail the test.
The other costs in the calculation
Beyond the theoretical interest, the count includes:
- Maintenance and incidental costs: estimated at a flat rate of around 1% of the property value per year.
- Amortization: the portion of the mortgage above two thirds of the value (the «second mortgage») must be repaid within about 15 years, or by retirement at the latest.
The numbers, on a real example
A CHF 800,000 property, with 20% equity (160,000) and a mortgage of 640,000:
• Theoretical interest at 5% on 640,000 = 32,000/year
• Maintenance 1% of 800,000 = 8,000/year
• Amortization (~107,000 over 15 years) = ~7,100/year
• Total theoretical costs ≈ 47,000/year
To stay within 33%, you need a gross income of about 143,000/year. Yet at a real rate of 2%, the actual interest would be just 12,800/year: less than half.
Figures for illustration: theoretical rate, maintenance and amortization rules vary from one lender to another.
The equity: the 20% (and the 10% «hard»)
As a rule you need at least 20% of the value in equity. Of this, at least 10% must be «hard» equity — savings, third pillar, gifts — and cannot come from the second pillar. The remaining 10% can also come from the pension fund, but with consequences for your future provision that need weighing.
What to do if you're on the edge
- Increase your equity: more down payment, less mortgage, less theoretical interest in the calculation.
- Reconsider the property price: sometimes a few tens of thousands less is enough.
- Add a co-borrower: a second income can change the equation.
- Compare lenders: banks, insurers and foundations assess with slightly different parameters, and the gap can be decisive.
Before you fall in love with a property, it pays to run the calculation at theoretical rates and see where you stand. Often there's more room than expected — you just need to structure the financing well.
Frequently asked questions
Why does the bank use 5% when real rates are lower?
It's a theoretical rate used to check you could carry the mortgage even at higher rates. It protects you and the bank against a future rise.
How much equity is needed?
As a rule at least 20% of the value. At least 10% must be «hard» equity, not from the second pillar; the remaining 10% can come from the pension fund.
What can I do if I don't meet the 33%?
Increase your equity, choose a more modest property, add a co-borrower or rethink the financing structure. Different lenders assess differently.
Want to know if your property is affordable?
Let's run the calculation at theoretical rates together, before the bank does. So you know where you stand and how to structure the financing.
Talk to GROVA →General information only; this does not replace personalised advice. Parameters, theoretical rates and rules can change over time and between lenders.