Unprecedented economic conditions

Borrowers are concerned. However, we should keep in mind that in recent years, we've enjoyed unprecedented economic conditions which have allowed us to borrow money at historically low rates.

Some may remember that in the early 1990s, rates of 7% were the norm, and 3% rates were utopian. The current international political and economic situation, coupled with the COVID-19 crisis, has been a breeding ground for inflation and has caused central banks to raise policy rates. However, an indefinite rising of rates is unlikely. 

It's now expected that 10-year fixed rates will stabilize between 1.5% and 3% over the next 12 months, with an overall high level of volatility. 

An unfounded fear

The fears that borrowers are experiencing are not (entirely) justified. They're being encouraged by some rather alarmist opinions which imply that continuing to rent is now more economically attractive than becoming an owner.

It's time to do some basic calculations to figure out when the cost of a mortgage really becomes less attractive than paying rent. 

To perform this exercise, simply compare the cost of interest on a mortgage to the theoretical rent for that property. Let's use simple figures as an example, keeping in mind that the price of a property and its rent vary greatly depending on its quality and location. 

A household with a total income of approximately CHF 200,000 per year wishes to acquire a 120 m2 condo in Geneva as its main residence for CHF 1,250,000. If they were to rent the same flat, the annual price tag could reach CHF 50,000 per year, or just over CHF 4,000 per month. 

A simple calculation (rent/amount of loan), allows us to immediately see that the amount of rent for the condo (CHF 50'000 per year) corresponds exactly to 5% of a CHF 1,000,000 loan, i.e., the amount of the couple's mortgage (with standard financing of 80% of the purchase price of CHF 1,250,000). 

So, taking into account the high end of the current 10-year rate (i.e., 2.5%), a homeowner in this example would save half their monthly payment. This is in addition to the economic benefits that a property owner enjoys that a renter does not.

A financial opportunity

The advantages to becoming a homeowner are numerous. In addition to the advantages between a mortgage payment and rent, we can identify in particular (1) tax savings: mortgage interest and maintenance costs are deductible from taxable income (despite the fact that the rental value is taken into account), (2) capital gains on the resale of the home when it's sold, (3) no rental increases (often indexed to the consumer price index or the benchmark interest rate, both of which appear to be rising).

When we ask ourselves whether we should continue (or return to) renting, we need to be practical. The above example is not applicable to all dwellings (as the rent/purchase price ratio varies from one dwelling to another). A property's rent will vary according to the quality of the property and its location and whether you live in an area where there's a shortage of rental properties or, on the contrary, in an area where supply clearly exceeds demand. In any case, the best thing to do is to consult a real estate professional, but this example clearly demonstrates that the recent rate correction doesn't necessarily negate the notion of investing in your own home.

This article was published in its original French version in Bilan magazine.