Anyone looking to own their own home must be able to answer this most fundamental of questions: which property can I afford based on my financial means? We’ll show you which essential factors are taken into account in real estate financing and some online calculation tools you can use to get an initial assessment of your financial options.
Should you buy or rent? This fundamental question is at the beginning of every property search. Whether or not the proposed purchase is a non-starter will depend on the one hand on your needs and wishes with regard to your new home and, on the other, on your financial means. The following questions are key:
- How much equity can you bring to the table and how much debt capital is needed as a proportion of the purchase price? The answer to this question can be found by calculating the loan-to-value ratio.
- Is your monthly income sufficient to cover the ongoing costs of financing, the mortgage payments and upkeep of the property? This can be easily calculated using the affordability calculator.
Calculating loan-to-value and affordability for home financing
Loan-to-value and affordability are two essential criteria when granting a mortgage for your new home.
The loan-to-value ratio is the percentage of a property that is financed by means of a mortgage.
| Value of the property | CHF 1’000’000 |
| Mortgage | CHF 700’000 |
| Loan-to-value ratio | 70% |
The banks have defined a maximum loan-to-value ratio of 80 per cent of the purchase price. This means that you must contribute at least 20 per cent of your own funds and a maximum of 80 per cent of the purchase price may be financed by a bank via a mortgage.
The affordability provides information on the ratio between the costs incurred for the property and its financing (interest, repayments (amortisation) for the second mortgage and ancillary costs) to the purchaser’s disposable income (salary from (self-)employment, income from assets, pensions and ancillary income) as a percentage. The following formula is used by the affordability calculator:
Affordability = (expenditure on interest + amortisation + annual maintenance) / annual income
A rule of thumb says that the affordability ratio must not exceed 33 per cent.
Please note that the listed rules on loan-to-value and affordability serve as a useful guide, but are not set in stone.
Get more clarity about your financial options with our affordability check
The newhome affordability check gives you an initial feel for your financial situation. Taking into account the rules on loan-to-value and affordability, it shows you whether you can afford to finance your desired property. To determine this, it needs just two pieces of information: your equity and gross income.
Here’s how it works:
- With a user account on newhome.ch you can carry out an affordability check by entering the purchase price, your equity capital and annual gross income to see whether a property is affordable at the specified purchase price. In the next step, you can directly view all viable properties based on your information and, if interested, directly request personal financing advice from a competent partner, i.e. the cantonal bank responsible for your region.
- Even without registering, you can calculate the affordability and send a request for financing advice via the property search or the detailed view of the advertised property.
Use the banks’ online mortgage calculator
For a comprehensive calculation, you can use a bank’s online mortgage calculator, such as the one here: The “Mortgage Calculator”. Much like the affordability check on newhome, you can use a mortgage calculator to work out how much your new home may cost. In addition, depending on the entered purchase price, as well as your income and equity, the mortgage calculator will show you the monthly payment for the mortgage as well as the maintenance and ancillary costs. The results will vary depending on the specified interest rate and the chosen mortgage product.
You can find further information on the subject of mortgages in the Mortgages section and under Financing real estate.
Summary
Financing a home is a complex undertaking. In addition to your own funds, the chosen mortgage product and the current interest rate also play a critical role. With some knowledge of the basic financing rules, and by using the affordability check from newhome and online mortgage calculators from the banks, you can get a firm understanding of where you stand financially. Nevertheless, it is a good idea to seek advice from a bank as early as possible.
