Buying or renting an apartment: What's worthwhile?

Couple looking out of window

Buying or renting an apartment: What's worthwhile?

Julia is 6 months pregnant. She and her partner Stefan are looking forward to their first child – and are thinking about their housing situation. Their old apartment is too small for mother, father, child and home office. A larger apartment is difficult to find in Winterthur – and expensive. That's why the two are considering whether buying would make more sense than renting.

Flexible and mobile or settled?

"First ask yourself whether you prefer to be flexible and mobile or settled," advises Petra's best friend. Wise advice. Buying an apartment is a decision with consequences. Julia is planning her medium-term future with Stefan in Winterthur and wants to return to work after the birth. First part-time, then full-time. She has already studied and worked abroad, and feels at home in the city. At 36, she doesn't yet have any concrete ideas about where and how she wants to spend her retirement. So there's a lot to be said for settling down. That's why Julia writes down the biggest advantages and disadvantages of home ownership.

Renting vs. buying: Five advantages of home ownership

  1. Housing costs: Thanks to historically low interest rates, buying is usually cheaper than renting.
  2. Security: Homeowners, unlike tenants, are safe from contract terminations.
  3. Retirement provision: The 2nd mortgage must be repaid (amortized). Thanks to falling interest rates on debt, housing costs fall in old age.
  4. Tax advantages: Homeowners are allowed to deduct debt interest, costs for value-preserving renovations and investments in energy measures from their taxable income.
  5. Increase in value: Demand is greater than supply. That's why well-maintained real estate in a good location is a solid investment and an important part of retirement provision.

Good to know: Renting has other advantages. Terminating a contract for an apartment is easier and faster than selling an apartment. In addition, tenants bear less responsibility, only have to take care of minor maintenance, pay less in maintenance costs and have more free capital at their disposal.

Renting vs. buying: Five disadvantages of home ownership

  1. Loans: Banks and insurance companies lend up to 80% for residential property (see "Lending, 1st mortgage and 2nd mortgage"). Homeowners must contribute at least 20% equity.
  2. Affordability: Housing costs may not exceed 35% of gross income (see "Affordability: How much residential property ownership can you afford?").
  3. Financial losses: Unemployment, a divorce, disability or death often lead to a lower income and can jeopardize affordability. Homeowners can protect their families against financial consequences with LifeRisk or term life insurance.
  4. Maintenance: The first major renovations or refurbishments will be due after 15 to 20 years at the latest. The longer they are put off, the more expensive they become.
  5. Market: On the one hand, mortgage rates can rise sharply and jeopardize affordability. On the other, the real estate market can collapse and the apartment could fall in value.

Homeowners must pay tax on the imputed rental value as fictitious income and on the value of the house or apartment as assets. However, you are allowed to deduct the mortgage debt, debt interest and maintenance costs.

Good to know: Renting has other disadvantages. Tenants generally pay more for a comparable apartment, but have less freedom when it comes to design. In addition, they have less say in matters and must adhere to the specifications of the property management.

Cost comparison: Rent vs. buy

Julia believes that buying would make more sense for Stefan and her. The two earn well, live modestly and have saved a little more than a quarter of a million francs together. Now Julia wants to find out if it's worth it financially. Rental apartments in Winterthur that would be large enough cost CHF 3,200 per month. For this, the two could currently buy a condominium for just over 1.1 million francs (ampounts in CHF):

Purchase price   1,111.594
Equity (20%)   222,319  
Borrowed capital (80%)    

1st mortgage  (65%)

  722,536 
2nd mortgage  (15%)   166,739 
     
Housing costs before taxes  Rent  Purchase
Rent including service charges 38,400  
Interest 1st mortgage (1.75%)   12,644
Interest 2nd mortgage (2.25%)   3,752
Service charges (0.65% of the purchase price)   7,225
Repayment of 2nd mortgage   8,337
Maintenance (contribution to the renewal fund)   3,891
  38,400 35,849
     
Required gross income   108,633
     
Tax effect
   
Imputed rental value, net   24,900
Deductible debt interest   -16,396 
Taxable income   8,504
    2,551
     
Housing costs after taxes 38,400 38,400

This is only a sample calculation with fictitious figures. Calculate online how much a house or apartment should cost to make buying cheaper than renting (source: HEV).

The calculation works as long as interest rates are as low as they are now. At the beginning of 2008 they were above 4.5% , and in the early 1990s they were even above 10%. That's why banks calculate the affordability of home ownership cautiously using an imputed mortgage rate of 4.5% or 5%, which is higher than current interest rates.

Tipp: If you are moving from a smaller apartment to a larger one, you should check whether the contents insurance and the personal liability insurance need to be adjusted. Building insurance is mandatory for homeowners, and security deposit insurance may be useful for tenants.

The search can begin

Julia is convinced. Now she has to define search criteria with Stefan. It's clear where they want to live: Winterthur (macro location). They don't yet know where exactly. These search criteria are important to them for the environment (micro location):

  • Distances to public transport
  • Stores in the vicinity
  • A day nursery in the vicinity
  • A kindergarten in the vicinity
  • A full-time school nearby
  • A lively neighborhood
  • Some greenery, nice views and sun

When it comes to the property, Julia and Stefan are open to ideas. New building or old building again, average fitting standard, plus/minus 120 square meters, at least four rooms, balcony or preferably a garden.

Lending, 1st mortgage and 2nd mortgage

Banks, pension funds and insurance companies lend up to 80 percent of the purchase price or market value on a property. Up to 65% as a 1st mortgage and the remaining 15% as a 2nd mortgage. So if you buy an apartment for CHF 1 million, you will receive CHF 650,000 as a 1st mortgage and up to CHF 150,000 as a 2nd mortgage. The 2nd mortgage has a higher interest rate and must be repaid; the 1st mortgage must not.

Affordability: How much residential property ownership can you afford?

Housing costs may not exceed 33% of gross income. These include mortgage interest, ancillary costs and amortization. Banks calculate affordability cautiously: They use 4.5% or 5% interest, although interest rates are currently much lower, and up to 1% for ancillary costs. In this way, they protect homeowners from rising interest rates that could blow their budget – and result in loan defaults.

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