How much do you have to earn to become a homeowner ?
When considering buying an apartment or house, people often focus on personal funds, when income is just as important in determining whether to get a mortgage. How do you know if you earn enough to become a homeowner ?
The first step of a real estate project consists in determining your purchasing capacity, in order to know your potential of acquisition and to be able to direct your research. Your purchasing capacity depends not only on your personal funds (income ratio), but also on your income (debt ratio). It is a complex calculation that takes into account many specificities.
The income ratio
In order to obtain a mortgage loan from a financial institution, you must generally provide an equity contribution of at least 20% of the value of the property to be financed. At least 10% of the equity must not come from the LPP or from a loan. You will also have to take into account the purchase costs (notary, taxes, land register and mortgage) which vary according to the canton, but can be estimated at around 5%. Learn more about how a mortgage loan works
It is also possible to pledge a part of your LPP, i.e. to put it in pledge, to obtain a mortgage loan up to 90% or to resort to an alternative solution to supplement the equity. For example, Evahomes.ch puts future buyers with sufficient income in touch with qualified private investors, so that they can become homeowners with only 10% of their own funds. Learn more about the Evahomes.ch solution
Knowing if you have enough personal funds is easier than calculating how much you need to earn to support the cost of the mortgage. Indeed, this calculation integrates several criteria and they are not always estimated in the same way by the lenders.
The debt ratio
The debt ratio, sometimes called the effort ratio, represents the ratio between the theoretical expenses related to the property (mortgage interest, amortization, maintenance costs) and the borrower's income. In general, it should not exceed 33%.
The expenses are divided into three parts:
To make the calculation, lenders use a theoretical interest rate set at 5%. This value, which is much higher than current rates, guarantees that you will be able to bear the costs of your mortgage over the long term, even if rates rise.
This safety margin was put in place following the economic crisis of the 90's during which the rates had exploded to more than 7%. Many homeowners could no longer afford to repay their loans and had to put their homes up for sale, which led to a drop in prices.
The amortization corresponds to the repayment of a part of your mortgage loan, the 2nd rank. For a classic financing, it amounts to 15% of the purchase value of the property and its amortization is spread, in theory, over 15 years or, depending on the age of the borrower, over the period between him and retirement.
Maintenance costs are the expenses necessary to keep your home in good condition. Again, this is a theoretical percentage, estimated at 1% of the value of the property.
Often, any other existing expenses, such as leasing or other loans, are also included in the calculation of the debt ratio and are deducted from the income.
The calculation is usually based on the gross income of the borrower - or of the couple if it is a joint loan - but some lenders may use the net income. Bonuses or net profits of the self-employed are not counted in the same way by different lenders.
The calculation of the debt ratio is done at the time of granting the mortgage, but also at the time of refinancing and the 33% rule may still apply. This is something to keep in mind if you are considering, for example, a career change or retirement. Will you be able to keep the right debt ratio if your income decreases? Don't panic, these things can be anticipated and it is possible to reduce your expenses in retirement with a good financing strategy. Make an appointment with one of our advisors to learn more
After the age of 50, it is possible that the income calculation is based on the estimated income at retirement, which has a strong impact on the debt ratio.
Example of calculation
For the purchase of a property at CHF 1'000'000, with 80% financing (CHF 800'000), the theoretical expenses would be:
Mortgage interest (5%) CHF 39'996
Depreciation CHF 9'996
Maintenance costs (1%) CHF 5'004
Total CHF 54'996
The gross annual income should therefore be at least 3x this amount, i.e. CHF 164'988. This is equivalent to a gross monthly income of CHF 13'749.
For this same example, the real expenses would be closer to CHF 1'903 with an interest rate calculated at 0.98% over 10 years. See the interest rate trend
There are however exceptions where it is possible that the monthly payments exceed one third of the household income. For example, depending on the age or the professional situation of the borrowers, the living expenses or the amount of the loan.
Finally, the criteria and rules for granting a mortgage differ from one lender to another. For example, they do not calculate income in the same way or interest rates and amortization.
The choice of financial institution is therefore very important for your project beyond the rates they can offer you, since it can greatly impact your purchasing capacity. It is therefore very interesting to go through a financing specialist who will do the comparison work for you.
Our calculator integrates the different criteria of lenders to accurately calculate your borrowing capacity with several institutions at once, allowing you to find the lender that best suits your particular situation.