Affordability for Investment Properties: How the Bank Calculates
You have found an attractive investment property, the numbers add up, the cashflow looks good -- and then the bank rejects the financing. The reason: affordability is not met. This happens more often than you might think, especially with investment properties. In this article, you will learn how Swiss banks calculate affordability, which special rules apply to investment properties, and what you can do when it is tight.
What Does Affordability Mean?
Affordability is the central test that every Swiss bank conducts before granting a mortgage. It answers a simple question: Can you sustain the ongoing costs of this property in the long term -- even if interest rates rise?
The key word is "long-term." The bank does not calculate with the current market rate of perhaps 1.5-2%, but with a significantly higher imputed interest rate. This ensures that you remain financially viable even in a high-interest scenario.
Affordability must be met before you can obtain a mortgage. A high equity contribution alone is not enough. Even someone who brings 40% equity will not get a mortgage if affordability is not met.
The One-Third Rule Explained
The rule of thumb for Swiss banks is:
The annual imputed housing costs may not exceed 33% of gross income.
This means: the bank takes your gross annual income, calculates one-third of it -- and checks whether the imputed costs of the property fall below that threshold.
What Counts as Gross Income?
- Salary (100% of fixed income)
- Bonus (often only 50-80% credited)
- Partner's income (with joint liability)
- For investment properties: a portion of the rental income (more on this below)
What Counts as Imputed Housing Costs?
- Imputed mortgage interest (5% on the total mortgage)
- Amortisation of the 2nd mortgage (1% of the mortgage amount or linear over 15 years)
- Maintenance and ancillary costs (flat rate of 1% of the purchase price per year)
Important: The bank calculates with the imputed interest rate, not with your actual mortgage rate. This is a crucial difference.
Imputed Interest Rate: Why 5%?
The imputed interest rate at most Swiss banks is 4.5-5%. It is based on the long-term average of mortgage interest rates over the last 30-40 years.
Why not the current rate?
A mortgage typically runs for 15-25 years. During this time, interest rates can rise dramatically. Someone who takes out a 10-year fixed-rate mortgage at 1.8% today may face 4% or more at renewal. The imputed interest rate ensures that you remain solvent even in that scenario.
FINMA (the Swiss Financial Market Supervisory Authority) provides the regulatory framework. The specific implementation lies with the banks and the Swiss Bankers Association (SBA), which issues guidelines on mortgage lending.
Some banks calculate with 4.5%, others with 5.0%. Individual institutions have slightly adjusted the imputed rate in recent years. As an investor, you should always assume the worst case and calculate with 5% -- then you are on the safe side regardless of which bank you approach.
By the way: the imputed interest rate does not mean you actually pay 5% interest. It is purely a calculation parameter for the affordability test. Your actual mortgage rate will be significantly lower.
1st and 2nd Mortgage: Structure and Amortisation
Swiss mortgages are standardly split into two tranches:
1st Mortgage (M1)
- Up to 50% of the lending value (for investment properties: the lower of the purchase price and the bank valuation)
- No amortisation requirement
- Lower interest rate, as the risk for the bank is lower
2nd Mortgage (M2)
- From 50% to 75% of the lending value
- Must be amortised -- within 15 years or by retirement
- Slightly higher interest rate
Example with a purchase price of CHF 1,000,000:
| Tranche | Amount | Amortisation |
|---|---|---|
| M1 (50%) | CHF 500,000 | None |
| M2 (50-75%) | CHF 250,000 | CHF 16,667/year (over 15 years) |
| Equity (25%) | CHF 250,000 | -- |
The amortisation of M2 is included as an expense in the affordability calculation.
Special Rules for Investment Properties
The affordability calculation for investment properties differs from that for owner-occupied homes in important ways:
1. Higher Equity Requirement
For investment properties, most banks require at least 25% equity (compared to 20% for owner-occupied homes). Some banks even demand 30-35%. Additionally, all equity must be "hard" -- pension fund assets are generally not accepted for investment properties.
2. Crediting of Rental Income
This is the biggest difference: for investment properties, rental income is partially credited as income. However, the bank applies a safety discount:
- Typically: 70-80% of net rent is credited as income
- The discount accounts for vacancy, rental defaults, and maintenance costs
- Some banks credit only 60%, particularly for older properties
This is crucial: without rental income crediting, affordability for investment properties would almost never be met, because the imputed costs at high purchase prices are enormous.
Tip: Ask the bank in advance what the rental income credit rate is. The difference between 60% and 80% can determine whether the financing is approved or not. Online banks and insurance companies sometimes offer more generous terms than traditional cantonal banks.
3. Stricter Bank Valuation
Banks value investment properties based on rental income (income capitalisation method). The lending value is the lower of the purchase price and the bank valuation. If the bank valuation is below the purchase price, you must contribute the difference as additional equity.
Worked Example: Is the Property Affordable?
Let us look at a concrete example:
Starting position:
- Purchase price: CHF 1,100,000
- Bank valuation: CHF 1,050,000 (decisive, as it is lower)
- Equity: CHF 275,000 (25% of CHF 1,100,000, plus CHF 12,500 for the difference)
- Mortgage: CHF 787,500 (75% of CHF 1,050,000)
- Net rental income: CHF 52,800/year
- Buyer's gross income: CHF 140,000/year
Step 1: Calculate Imputed Costs
| Item | Calculation | Amount |
|---|---|---|
| Imputed interest (5%) | 5% x CHF 787,500 | CHF 39,375 |
| Amortisation M2 | 1% x CHF 787,500 | CHF 7,875 |
| Maintenance & ancillary costs | 1% x CHF 1,050,000 | CHF 10,500 |
| Total imputed costs | CHF 57,750 |
Step 2: Determine Income
| Item | Calculation | Amount |
|---|---|---|
| Gross income | CHF 140,000 | |
| Rental income credit (75%) | 75% x CHF 52,800 | CHF 39,600 |
| Total eligible income | CHF 179,600 |
Step 3: Check Affordability
Affordability ratio = CHF 57,750 / CHF 179,600 x 100 = 32.2%
The affordability ratio is 32.2% -- just below the 33% threshold. The property is affordable. But there is hardly any margin.
Without the rental income credit, the picture would be very different: CHF 57,750 / CHF 140,000 = 41.3% -- well above the threshold.
What to Do If Affordability Is Not Met?
1. Contribute More Equity
More equity means a smaller mortgage and thus lower imputed costs. Someone who contributes 35% instead of 25% reduces the mortgage considerably.
2. Bring in a Second Person
A co-investor or spouse as a jointly liable person increases the eligible income.
3. Switch Banks
Not all banks calculate the same way. The rental income credit varies between 60% and 80%, the imputed interest rate between 4.5% and 5%. A comparison is worthwhile.
4. Look for a Cheaper Property
Sometimes the most honest answer is: the property does not fit the financial situation. A smaller or cheaper property may be the better choice -- with a healthy buffer instead of tight affordability.
5. Increase Income
Not achievable overnight, but relevant in the medium term: a higher income directly improves affordability. Additional income or rental income from an existing property can also help.
6. Negotiate the Purchase Price
A lower purchase price has a double effect: less equity needed and lower imputed costs. In the current market, price negotiations for investment properties are more realistic than for owner-occupied homes.
7. Indirect Amortisation Instead of Direct
With indirect amortisation, you do not repay the mortgage directly but instead pay into a pillar 3a solution. The mortgage remains at the same level, which is tax-advantageous (higher mortgage interest deductions). At the same time, the 3a contribution may be considered asset accumulation for affordability purposes. Ask your bank whether indirect amortisation is accepted and how it affects affordability.
Affordability with Multiple Properties
If you already own one or more investment properties, the affordability calculation becomes more complex. The bank considers your entire property portfolio:
- Existing mortgages and their imputed costs are added up
- Existing rental income (with a discount) is counted as income
- The total burden must remain below 33% of total income
This can be an advantage: if your existing properties are well-tenanted, they strengthen your income profile. But it can also be a disadvantage if older properties generate high imputed costs.
Affordability and Cashflow: Two Different Worlds
A common misunderstanding: "If the cashflow is positive, affordability is automatically met." This is not true.
Affordability uses the imputed interest rate (5%), not the actual rate. A property can have a wonderfully positive cashflow (because the current rate is 1.8%) and still fail the affordability test (because 5% imputed interest blows up the calculation).
Conversely: affordability says nothing about the actual cashflow. It is a stress test, not a reflection of reality.
The yield of the property -- i.e., gross yield, net yield, and return on equity -- is yet another perspective, independent of affordability.
Check Affordability Automatically
Want to know whether your target property is affordable? The immometrics affordability calculator computes the imputed costs, accounts for the rental income credit, and immediately shows you whether the 33% threshold is met.
Check the affordability of your property -> /tragbarkeit-rechner