Renting vs. buying – Consider the advantages and disadvantages

Interest rates on mortgages are at historically low levels. However, the situation could soon change. That is reason enough to start thinking about whether it might be worthwhile to buy a house instead of renting.

Does it cost less to buy or rent?

It's an amazing fact that, in Switzerland, two-thirds of households continue to rent. One reason for that may be the comparatively strict requirements on obtaining financing. At least 20% of the purchase price for a house or apartment must be financed using equity capital. At the same time, properties are expensive – particularly in sought-after locations. When one looks at the monthly costs of owing a home, however, these costs are often lower than for a similar rental property.

This is particularly true at present given the historically low mortgage interest rates. Yet, there are still financial aspects to consider, such as mortgage repayments, maintenance costs, and ancillary costs for your home, along with the impact it has on your taxes. Below is a sample calculation:

Monthly costs: Renting or buying

Price of a new 4.5-room apartment in the city of St. Gallen, fourth quarter of 2017.
Data source: Wüest Partner

Financing Costs
Rent (including ancillary costs) Annual rent: CHF 22,990

Owner-occupied apartment
Value: CHF 819,000

Loan-to-value ratio: 80%
Mortgage interest rate (3-month LIBOR): 1.17%
Maintenance: 1.00% 

Mortgage interest: CHF 7,666
Maintenance: CHF 8,190

Total: CHF 15,856 

Owner-occupied apartment
Value: CHF 819,000

Loan-to-value ratio: 80%
Mortgage interest rate (fixed mortgage, 8 years): 1.50%1
Maintenance: 1.00% 

Mortgage interest: CHF 9,828
Maintenance: CHF 8,190

Total: CHF 18,018 

Tax aspects such as the imputed rental value and repayment of the second mortgage have not been taken into account.
1 Credit Suisse interest rate on July 16, 2018

Interest rate is relevant when deciding whether to buy or rent

Not included in the calculation are the costs for repayment of the second mortgage. This is because with repayment, the capital changes from cash assets to real estate assets, but remains under the same ownership. However, the repayment must always be factored into the budget planning. For the sake of simplicity, tax aspects such as the imputed rental value were excluded. This is dependent on your personal income situation and its impact can vary.

As shown in the example, the financial cost of home ownership in Switzerland is often much lower than for rented properties. This is thanks to the currently very low mortgage interest rates. However, the calculations also show the extent to which the costs of an owner-occupied home depend on mortgage interest rates. If interest rates are higher, the costs for the owner-occupied home can sometimes be just as high as or even higher than for a comparable rental property. With a fixed-rate mortgage, the favorable interest rate remains the same for the entire term. In this way, you can continue benefiting from the lower interest rate level for a long time, even if interest rates increase.

Your financial circumstances are not the only criterion that you should consider when thinking about whether to rent or buy. There are advantages and disadvantages both to owning your own home and to renting. What you need to consider before buying is how important these advantages and disadvantages are in relation to your personal needs.

In conclusion, renting or buying a home depends on your personal preferences

Besides the financial reasons, there are other aspects – particularly emotional ones – that play a key role in the decision of whether to buy or rent. Many people begin dreaming about owning their own home while they are still children. Living in or building the house of your dreams plays an important role in this respect.

Are you planning to purchase residential property?

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