Mortgage and retirement: a recurring topic

Many homeowners who are about to reach retirement age are concerned about their financial situation. Lenders assess the affordability of a mortgage based on income and assets, but in retirement, income usually drops considerably - on average to around 60% of the last gross income. This can reduce the chances of extending an existing mortgage or obtaining a new one, as banks do not calculate with the real interest rate, but with the notional, higher imputed interest rate of around 5% and expect that the annual mortgage costs (interest as well as maintenance and ancillary costs) do not exceed one third of the total income. This is to ensure that the mortgage can be paid even if interest rates rise. This calculation method also applies to people of retirement age.

If you decide to keep the property, it is very likely that the mortgage will have to be renewed after retirement, which can be problematic. Many owners fear that they will no longer be able to make the mortgage payments or meet the conditions for financing. This is particularly worrying because many senior citizens look forward to spending their free time at home, combined with the good feeling of having made good provisions with their own property. Timely preparation for this transition is therefore very important in order to avoid unpleasant surprises.

Start saving early: the key to success

Basically, the earlier you invest in your retirement savings, the better. If you start early, you will benefit in the long term - even lower deposit amounts can lead to a significantly larger savings balance. Saving for your pension from the start of your career is therefore crucial to ensure financial stability in retirement. The first two pillars of Swiss pension provision (AHV/AVS and pension fund BVG/LPP) often only cover part of the usual income, which is why the 3rd pillar (3a and 3b) is an important supplement. Those who already pay regularly into the 3rd pillar today not only secure their future, but also enjoy tax advantages now. In addition, payments into the 2nd pillar (occupational pension - BVG/LPP) help to close pension gaps and thus increase pension benefits while reducing the tax burden.

Plan your financing from the age of 50

As a homeowner, you should consider your financial situation after retirement at an early stage - ideally from the age of 50, but no later than 55. At this age, it is important to carry out a thorough analysis of your own financial situation and consider future scenarios with regard to the reduced income after retirement. To do this, compare the estimated pension amount (AHV/AVS + pension fund) with the expected imputed living costs. The ratio should be at least 3:1. This planning makes it possible to take measures at an early stage to reduce risks and ensure that you can continue to live in your own home without worries.

Here are a few tips:

a. Reduce the mortgage before the age of 65

In order to reduce the financial burden in retirement, it is often recommended to start early amortisation of the mortgage during the working years. Direct amortisation means paying off part of the debt, which reduces interest costs and improves affordability. Alternatively, there is indirect amortisation, where payments are made into a pension account (pillar 3a) while the mortgage remains in place. At retirement age, the capital saved can then be used to pay off the mortgage in full or in part. The aim of this strategy is to reduce the debt burden in good time before income falls. However, you should only amortise what is necessary and not aim for the maximum at all costs. This is because the capital used for amortisation is no longer available for unforeseen expenses relating to the property, such as replacing the heating or the roof.

b. Review the mortgage contract

It is also advisable to analyse your mortgage situation a few years before retirement. Some mortgage contracts are more flexible than others and it may be advantageous to renegotiate the terms with the bank. A long-term fixed-rate mortgage could offer more stable and predictable terms. Owners can also switch from a variable-rate mortgage to a fixed-rate mortgage to protect themselves from potential interest rate rises - especially if the markets become more volatile. However, from the age of 75, it is advisable to only take out fixed-rate mortgages with shorter terms in order to remain more flexible and avoid the risk of a serious inheritance split. Some banks even require early termination if the owner dies, which can be expensive.

c. Diversify sources of income

Make sure early on that no pension gaps arise or become larger by increasing your savings rate and buying into the pension fund, for example, and thus increasing future pension payments. Although the AHV/AVS and pension fund are the main sources of income for pensioners, it can be helpful to have other sources of income to ensure financial stability. Investing in diversified financial products such as bonds, shares or rental properties can be a good long-term strategy. They provide additional income to ease the burden of mortgage costs. A balanced investment portfolio could also compensate for a drop in income and offer greater flexibility if necessary. Some owners also decide to rent out part of their home (room, separate apartment) to generate additional income.

d. Examine alternative solutions

In some cases, where the mortgage is not sustainable with pensions, alternative solutions may make sense. One option is to sell on an annuity: The pensioner receives an income and capital and can still live in their home. Instead of selling the property, owners can also transfer it to close relatives and secure a right of residence or right of use. This option works like a tenancy agreement: you stay in your own four walls, but transfer some or all of the rights to the property to your children. Another solution could be to exchange the house for an apartment, for example because the children have left home or the spouse has died. By moving to a smaller and less expensive property, the mortgage costs are reduced or the debt is eliminated altogether. However, such a move must be well prepared, as the transition can be tricky if the sale and purchase do not take place at the same time and the mortgage cannot be transferred to the new property.

Now it's your turn!

Early planning is crucial for ensuring a peaceful and carefree lifestyle during retirement. Property owners should analyse their financial affordability early on - ideally around 15 years before they plan to retire - and take appropriate measures to enable a relaxed life in their own home even after retirement. Whether through early amortisation, renegotiation of the mortgage or diversification of income - there are many strategies for optimal preparation. It's best to seek expert advice early on, for example from Resolve, and take the steps mentioned in good time. This way, nothing stands in the way of a carefree retirement in your own four walls, and you can enjoy this time to the full.