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  #41  
Old 10.01.2017, 14:59
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Re: Mortgage tips and risks

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But then the X% would be treated and taxed as normal rent/income on the parents side which may not be favorable.
Yes, but if they're retired, they likely pay less taxes than their working daughter on it and so it's beneficial.
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  #42  
Old 10.01.2017, 15:04
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Re: Mortgage tips and risks

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[/B]Do not buy any property where the average historical
interest rate used for calculating affordability is
significantly higher than the current rental yield!
(yes 1-2% higher is significant!)[B]
You're saying essentially 'don't buy anything in Switzerland at all'

Current rental yields are 4-5% at best. And banks use 5% mortgage rate for affordability calculations. That becomes even 6-7% if you add amortization and NK/maintenance payments.
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  #43  
Old 10.01.2017, 15:06
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Re: Mortgage tips and risks

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You're saying essentially 'don't buy anything in Switzerland at all'

Current rental yields are 4-5% at best. And banks use 5% mortgage rate for affordability calculations. Actually, even 6-7% if you add amortization and NK/maintenance payments.

Yep that's what I'm saying.

Edit: Unless you can find that place where the rental yield exceeds 5%. My calculations are very simple, so you have to make various adjustments if you want to work out exact numbers to help you make your decision. For me it's simple: yield <= interest rate => don't buy, yield > interest rate => think about it.
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  #44  
Old 10.01.2017, 15:17
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Re: Mortgage tips and risks

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Yep that's what I'm saying.

Edit: Unless you can find that place where the rental yield exceeds 5%. My calculations are very simple, so you have to make various adjustments if you want to work out exact numbers to help you make your decision. For me it's simple: yield <= interest rate => don't buy, yield > interest rate => think about it.
but currently yield is > effective interest rates. How does it matter what the banks use as affordability? That may change over night - actually I read somewhere that ZKB wants to use a lower %
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  #45  
Old 10.01.2017, 15:22
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Re: Mortgage tips and risks

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but currently yield is > effective interest rates. How does it matter what the banks use as affordability? That may change over night - actually I read somewhere that ZKB wants to use a lower %
Historically interest rates return to the normal, 'It's different this time' are the 4 most dangerous words with regards to investments.

If house prices fell 50%, they would hardly look cheap, people have very short memories. Cheap money has produced price rises not backed up by salary rises.

Basel III may address this 'issue' fairly quickly, this should have been introduced on the 1st January 2017.......... cough cough it's been delayed.
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  #46  
Old 10.01.2017, 15:31
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Re: Mortgage tips and risks

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but currently yield is > effective interest rates. How does it matter what the banks use as affordability?
It matters in a sense that, as I said earlier, a buyer of a house is essentially making a bet on current interest rates vs historical averages. (regardless if his /her mortgage rate is fixed or not)

Knowing that interest rates are on their way up, yields should also be on their way up, and house prices on their way down. Buying now doesn't make sense until interest rates stabilize / return to their historical averages or new historical norms.


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That may change over night - actually I read somewhere that ZKB wants to use a lower %
The affordability criteria might differ so the banks can lend more and make more money, but historical interest rate averages aren't affected by that.
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  #47  
Old 10.01.2017, 15:31
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Re: Mortgage tips and risks

UBS bubble index is up to Q3 2015. they should do their 2017 outlook soon i expect.

https://www.ubs.com/ch/en/swissbank/...te-market.html
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  #48  
Old 10.01.2017, 15:32
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Re: Mortgage tips and risks

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**** BEST PIECE OF ADVICE ****


Please help me digest what you wrote. So "Net Annual Rent" is the Kaltmiete. What is "Average Rental Yield"? Is that the average for the whole market? Where did you get this value? I know this equation:

annual rental yield = net annual rent / property value

From my observations, a rental yield / rent cost of 3% works well in Zurich. So if rent costs 3% and mortgage 1%, it's a 2% gap that we take advantage of.

The historical average of 5% has nothing to do with it, because we are discussing a fixed rate. If the rates would go up to 8%, would they still calculate Tragbarkeit at 5%? I doubt it. It's debatable if the Tragbarkeit calculation is still reasonable.

A good question is: if the interest rate goes up, how will it influence property and rent prices? Currently we observe in Switzerland, that with a mortgage of 1%, the rent cost lies by 3%. This 2% difference I could also observe in other european countries. So for example, if mortgage cost is 4%, the rent is 6%. My guess is, an interest rate raise would result in property price drop and rent cost raise, no idea which effect will be stronger though.

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Basel III may address this 'issue' fairly quickly, this should have been introduced on the 1st January 2017.......... cough cough it's been delayed.
What is Basel III?
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  #49  
Old 10.01.2017, 15:34
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Re: Mortgage tips and risks

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Knowing that interest rates are on their way up, yields should also be on their way up, and house prices on their way down. Buying now doesn't make sense until interest rates return to their historical averages or new historical norms.
How do we know interest rates are on their way up ? A bank lends against what its army of researchers think will happen to the market. so right now, for example, you can get a 10 year fix at around 1.2%. So this means banks think that they can lend out at 1.2% and not end up losing money. Of course, every chance exists as FMF's says, that all the banks are wrong and its going to come down like a house of cards, in which case we all Toast. But that risk exists in any investment. Keep it in the bank ? the bank could go under. Shares ? could be worthless tommorow ? under the mattress ? you could be burgled..
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  #50  
Old 10.01.2017, 15:39
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Re: Mortgage tips and risks

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How do we know interest rates are on their way up ? A bank lends against what its army of researchers think will happen to the market. so right now, for example, you can get a 10 year fix at around 1.2%. So this means banks think that they can lend out at 1.2% and not end up losing money. Of course, every chance exists as FMF's says, that all the banks are wrong and its going to come down like a house of cards, in which case we all Toast. But that risk exists in any investment. Keep it in the bank ? the bank could go under. Shares ? could be worthless tommorow ? under the mattress ? you could be burgled..
Yeah it's nice and responsible to talk about risks but I laid out the facts and would like to hear what people really think is the optimal solution with regards to cost optimization and risk. Is renting + keeping a 0.1% savings account the real responsible solution?
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  #51  
Old 10.01.2017, 15:42
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Re: Mortgage tips and risks

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But this kind of cost naturally has to be in there with regular Nebenkosten when you rent? I can't imagine a renting company would not count that and not put this cost on the tenants.
They don't.

My NK as owner is about 50% more than it was as renter (same apartment).

Building insurance also wasn't included in the renting NK.

Tom
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  #52  
Old 10.01.2017, 15:44
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Re: Mortgage tips and risks

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If the building has things like an elevator this will also have maintenance and electricity costs that you need to contribute to even if you don't use them.
In our case, the amount depends on which floor you are on. Higher the floor, the more you pay.

Tom
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  #53  
Old 10.01.2017, 15:46
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Re: Mortgage tips and risks

There's risk no matter what you do. If you'd like to bet that interest rates will stay low and house prices high - buy a property. Alternatively you can bet on stock market returns and buy some stocks or etf. If you are very risk averse or just lazy, you can keep the money at 0.1% or in pension funds and bonds, but you're betting anyway then that the swiss frank will appreciate, and there are signs it's overpriced now. Ideally I guess you'd want to diversify in everything.
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Old 10.01.2017, 15:55
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Re: Mortgage tips and risks

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There's risk no matter what you do. If you'd like to bet that interest rates will stay low and house prices high - buy a property. Alternatively you can bet on stock market returns and buy some stocks or etf. If you are very risk averse or just lazy, you can keep the money at 0.1% or in pension funds, but you're betting anyway then that the swiss frank will appreciate, and there are signs it's overpriced now.
.
True words, but if we are talking in a 20-30 year perspective, can't we compare the options at least with moderate certainty? I mean, if the bank offers you 0.1% on a savings account and then lends your money for 1.1%, then it keeps this 1% for itself.

I know people who only buy apartments for rent with cash. They also buy land, physical gold, and works of art, "just in case". Sometimes it makes me think I'm too optimistic about the world...
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Old 10.01.2017, 16:08
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Re: Mortgage tips and risks

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Keep it in the bank ? the bank could go under. Shares ? could be worthless tommorow ? under the mattress ? you could be burgled..
Your ignoring the fact this is a geared investment, so with a 20% deposit your risking 500% of your investment. A small 20% fall is a 100% loss to you. The risk is way higher than investing 20% in the S&P500.
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What is Basel III?
https://en.wikipedia.org/wiki/Basel_III
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  #56  
Old 10.01.2017, 16:08
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Re: Mortgage tips and risks

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True words, but if we are talking in a 20-30 year perspective, can't we compare the options at least with moderate certainty? I mean, if the bank offers you 0.1% on a savings account and then lends your money for 1.1%, then it keeps this 1% for itself.
Stocks are probably the best and safest in the long term.

Property currently gives good returns/savings, comparable to stocks, but that can easily change in an instant, should the market conditions change. And it's less certain that it'd recover. If you can find something at a very good price (i wouldn't consider 3% yield in your calculations good; 5%+ is what i'd buy), you're able to easily sustain a loss of its value (e.g. 30% drop like last time), then it's not such a bad investment. Buying your own home also makes sense currently as its about the only sensible use of money in the pension funds, which pay 1% or less.

Last edited by ivank; 10.01.2017 at 16:27.
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Old 10.01.2017, 16:14
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Re: Mortgage tips and risks

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Your ignoring the fact this is a geared investment, so with a 20% deposit your risking 500% of your investment. A small 20% fall is a 100% loss to you. The risk is way higher than investing 20% in the S&P500.

Yes I stand corrected. thought of that too late.
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Old 10.01.2017, 16:17
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Please help me digest what you wrote. So "Net Annual Rent" is the Kaltmiete. What is "Average Rental Yield"?
Net i.e. with NK stripped out, to make the comparisons / calculations uniform.

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Is that the average for the whole market? Where did you get this value? I know this equation:

annual rental yield = net annual rent / property value
You'd have to look up some housing research from the big banks / consulting companies, I saw some good research from CS, UBS and Wuest & partner.

Essentially there are many types of yields and the closer you get the real yield the better your housing valuation would be. For comparing over a historical period you just need to use the same methodology.

A simple way is to just look at historical ask prices in comparis (use the most recent one) and look for historical rental prices within the same neighborhood, strip out the NK and voila! (rent x 12 / historical ask price gives you the ask price implied net rental yield)

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From my observations, a rental yield / rent cost of 3% works well in Zurich. So if rent costs 3% and mortgage 1%, it's a 2% gap that we take advantage of.
It's pointless looking at the gap as you call it, or spread between rentals vs interest paid on the same value without looking at the risk. This spread is the risk adjusted premium the owner receives for taking the risk.

A renter will never lose any money other than the rent he is paying. The owner could theoretically lose 100% of the house value.

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The historical average of 5% has nothing to do with it, because we are discussing a fixed rate. If the rates would go up to 8%, would they still calculate Tragbarkeit at 5%? I doubt it. It's debatable if the Tragbarkeit calculation is still reasonable.
They should still use the historical average whatever that historical average is, the problem is that if they want to lend you money, they will use what you have to pay as interest. If risk free rate is 8% then I would expect them to use whatever IR they charge on your mortgage.

So affordability rate = Max (Historical IR Average, Mortgage IR)


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A good question is: if the interest rate goes up, how will it influence property and rent prices? Currently we observe in Switzerland, that with a mortgage of 1%, the rent cost lies by 3%. This 2% difference I could also observe in other european countries. So for example, if mortgage cost is 4%, the rent is 6%. My guess is, an interest rate raise would result in property price drop and rent cost raise, no idea which effect will be stronger though.
IRs up => Yields up => House prices down (all other things being equal)

Rent is assumed to be the same. In the same way that rents didn't not reduce when interest rates went down.



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There's risk no matter what you do. If you'd like to bet that interest rates will stay low and house prices high - buy a property. Alternatively you can bet on stock market returns and buy some stocks or etf. If you are very risk averse or just lazy, you can keep the money at 0.1% or in pension funds and bonds, but you're betting anyway then that the swiss frank will appreciate, and there are signs it's overpriced now. Ideally I guess you'd want to diversify in everything.
There is indeed risk no matter what, hence why it's more prudent to look at the risk adjust return etc, I am not expert in this area (User xynth is very good at this stuff, but he's gone AWOL probably spending his millions on boats and expensive sports cars )
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  #59  
Old 10.01.2017, 16:36
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Re: Mortgage tips and risks

Just some thoughts here on the thing about banks determining the value of the property and being able to recall a mortgage if it falls below a threshold value.

Basically that means a mortgage can be terminated even if you are able and willing to continue paying it.

I have a friend in Spain who bough her appartment at the peak of the bubble and is now in serious negative equity. As her family has grown she would like to move to a larger place but cannot sell because selling would automatically trigger a repayment of the mortgage and that is presently bigger than the sales value.

So in Switzerland you can be forced to sell a place if it falls below a threshhold whereas in Spain you are forced to keep it until the price recovers.

Strange, no?
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Old 10.01.2017, 16:47
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Basically that means a mortgage can be terminated even if you are able and willing to continue paying it.
It's a safety measure for the bank. What if the property continues to depreciate further? Then at some point the proceeds from the sale won't cover the debt anymore, and so the bank intervenes long before that can possibly happen.

IMHO it's better and safer system than letting not sufficiently secured debts accumulate.

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So in Switzerland you can be forced to sell a place if it falls below a threshhold whereas in Spain you are forced to keep it until the price recovers.
You're not forced to sell as long as you have the cash to increase the margin back to a safe level for the bank.
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