The provider market for home financing is very non-transparent in the area of increased affordability, says Moneypark. Because in many cases it is not known which providers finance under which conditions. Disclosure of financing terms by providers alone would significantly improve transparency and thus access to mortgages.
Home prices have risen five times faster than household incomes over the past decade and over 40% of homebuyers do not meet standard affordability but still receive mortgage financing. Banks often grant such exemptions, but primarily top earners benefit instead of families. This was shown in a recently published analysis by Moneypark (investrends).ch reported). "Based on this factual situation, a review of the current practice regarding the calculation of affordability is urgently indicated," say Stefan Meyner, Senior Analyst and Stefan Heitmann, CEO and Founder of Moneypark.
The barriers to home ownership in Switzerland are the strictest in the world, according to Moneypark. The circle of potential mortgage borrowers is thinning out year by year, as the price increases mentioned above are restricting access to home financing. Moneypark experts agree: "The combination of rising home prices and overly rigid and inflexible affordability requirements is toxic. The standardized criteria for calculating affordability ignore the sharp drop in interest rates, take no account of individual factors and their application is opaque." More detailed affordability testing and disclosure of terms would significantly increase access to homeownership financing.
Little transparency among providers
Almost all economists now assume that Switzerland's negative interest rates will remain in place for years to come. In addition, the number of mortgage providers is constantly increasing due to new pension funds and investment foundations entering the market. Thus, according to the mortgage consulting firm, it can be assumed with some certainty that mortgage interest rates are not likely to experience significant increases, even over a period of years. Due to this (new) situation, the currently applicable imputed interest rates of 4.5 to 5% have become unrealistic, say the experts: "From this point of view, it is hardly surprising that the standard sustainability rules are being undermined by an increasing number of providers, especially pension funds and foundations. This insight is a ray of hope for potential new home buyers. However, there is also an unfortunately still pronounced downside to the coin: First, transparency on the supplier side is extremely poor. It therefore takes a great deal of time, uncertainty and additional knowledge to find the right provider for the individual."
Study results from Moneypark show that over a third of potential home buyers believe that they do not meet the standard affordability rules. This means that they either put the dream of owning a home on hold or classify it as unattainable. This, mind you, in a rental market where an owner typically saves up to 50% in monthly housing costs compared to a comparable rental situation.
New calculation model with differentiated perspective
Moneypark believes that a more differentiated view of the individual customer situation would be helpful, in which the same affordability criteria are no longer applied to every customer in a template-like manner. Especially for medium household incomes (z.B. in the range of CHF 120,000 to CHF 180,000), more precise affordability calculations with a differentiated approach could lead to a slight increase in the home ownership rate in the coming years. And this without increasing the risks, neither for the mortgage lender nor for the home buyer. From a regulatory point of view, nothing stands in the way of more detailed affordability models. This is because Finma, as the regulator, has so far not made any binding requirements on portability.
The company also immediately gives a concrete recommendation as to what the calculation models could look like:
1. Detailed budget calculation (based on statistics and empirical values): The realistic cost of living is now included in the calculation of affordability in the same way as the imputed property costs.
2. Term-dependent imputed interest rate: The imputed interest rate is made dependent on the selected term of the concluded fixed-rate mortgage. If a term of ten years or more is selected, a lower interest rate can be taken into account. For example, an imputed interest rate of 4.5% is applied to a fixed-rate mortgage of less than ten years. Each additional year of maturity reduces the imputed interest rate by 0.10%. Thus, for a 15-year fixed-rate mortgage, an interest rate of 4% would apply, and for a 20-year mortgage, a rate of 3.5%.
3. Realistic ancillary costs: the energy condition of the property is taken into account. If minimum standards are met, operating costs will be reduced to a realistic amount or. fixed. This is no longer to be based on the market value of the owner-occupied home, but on the value of the building, the cubage or the net living space, without taking into account the land value.
Calculation example new model
New model would increase demand
Disclosing the conditions for meeting affordability for owner-occupied housing would significantly increase transparency, the experts say: "A shift to a more accurate affordability calculation would v.a. Improve access to home ownership for families and people with middle incomes. A flat reduction in the imputed interest rate from 5% today (for example, to 3.5%) we do not consider as purposeful. Our recommended adjustments in the model affordability calculation would not result in any increased risk – neither for mortgage borrowers, nor for the home ownership market. We assume that although an increased demand would arise. However, this would gradually appear over the next months and years. This would give the construction industry enough time to adjust construction activity to the increased demand."