From house to condominium. Making the right plan.
If their own four walls begin to feel too big in old age, many people decide to look for alternatives. Moving from a single family dwelling to an apartment raises a number of complex questions about financing that you should be aware of.
The children have moved out, and retirement is around the corner. Many couples in this situation decide they would like to move out of their current single family dwelling, and begin looking for an apartment in a central location. If a suitable property is found, decisions must be made quickly – attractive apartments are in high demand. This leads to a number of questions: Can we afford the apartment, even after retirement? Should we sell our current house immediately, or keep it and rent it out? What are our options for financing a new property? Sound financial advice helps you keep sight of the big picture when dealing with complex decisions like these.
Sell or rent?
When changing properties, you have three options. One is to sell the old property before acquiring a new one. This allows the equity capital from the old property to be counted directly towards the new, avoiding the burden of a double mortgage. If you want to wait to sell the old property to get a better price, bridge financing will be necessary. This will temporarily require additional disposable assets and, if insufficient equity capital is available, an additional mortgage. A third option is to rent out the property and use the rental income to reduce the burden of the double mortgage.
Assess every risk
If you would like to transfer the property to your children at a later date, the third option is a good choice. This can also pay off in the long term. The rental income serves to cover the mortgages and the house's ancillary costs. Even if the couple retires after a few years and reduces their income to 98,000 francs, costs will remain below a third of the income (affordability of 30.66%). Although this seems attractive financially, you must also be aware that as a landlord, you will have to bear rental and vacancy risks and deal with the tax consequences of owning two properties.
Sample calculation: affordability of second property
Taking current income as the basis, the costs amount to a 21.46% share. Affordability is good in the case of the permitted 33%. Income is lower in retirement, hence the importance of calculating affordability in the future as well. With a joint pension income of CHF 98,000, the couple has an affordability of 30.66%. That means both properties are affordable, even in retirement.
| Initial situation |
|
| Total gross annual income |
CHF 140,000 |
| Assumed gross income after retirement (approx. 70%) |
CHF 98,000 |
| Currently occupied single family dwelling |
| Market value of single family dwelling CHF 1 million |
| Mortgage of CHF 660,000 (66%, i.e. within first mortgage and therefore no repayment) |
| Affordability calculation |
|
| Annual interest costs (notional 5%) |
CHF 33,000 |
| Annual ancillary costs of 1% of market value |
CHF 10,000 |
| Annual amortization |
CHF 0 |
| Annual costs |
CHF 43,000 |
| Achievable market rent CHF 3,500 monthly |
CHF 42,000 annually |
| Total annual costs after rental income |
CHF 1,000 |
| New condominium (second property) |
| Market value of new condominium CHF 680,000 |
| Mortgage CHF 445,000 (65.44% loan to value) |
| Affordability calculation |
|
| Annual interest costs (notional 5%) |
CHF 22,250 |
| Annual ancillary costs 1% of market value |
CHF 6,800 |
| Annual repayment |
CHF 0 |
| Total annual costs |
CHF 29,050 |
| Total annual costs for two properties |
CHF 30,050 |
The question of equity capital
If you decide in favor of a later sale or rental, sufficient equity capital must be invested. In general, equity capital tied up in the current property can be transferred to the new property. This is possible if the burden on the first property amounts to less than 80%. The mortgage can then be increased, but must be repaid up to 66% before retirement. Of course, other equity capital can also be used, such as that from the liquidation of securities or released pension capital.
Financing a change of residential property can quickly become complex. Get in touch with your advisor and set an appointment to analyze your personal situation in more detail.
