Should you keep your mortgage during retirement despite rising rates ?
With interest rates climbing above 3% this year, is it prudent to maintain your mortgage into retirement ? Ceasing professional activity often leads to a reduction in income, carrying the risk that current expenses, along with the mortgage, may surpass the legally established debt ratio. In the context of widespread inflation, what is the optimal strategy ?
Key rates raised during inflation
The American Central Bank has recently increased its benchmark rate, with the European Central Bank following suit. Meanwhile, the Swiss National Bank has chosen to keep its rate steady at 1.75%.
Amidst widespread inflation, numerous retirees in Switzerland are contemplating their options, a concern that might resonate with you as well. With rising interest rates, the question arises: What should be done with your mortgage ? This situation could become especially challenging if you have a Saron mortgage contract.
You can keep your mortgage if your retirement is well planned
Having a mortgage during retirement doesn't have to be a disadvantage. Just because key interest rates are rising, it doesn't mean you need to rush to pay off your debt. With careful retirement planning, you can certainly keep your mortgage and accommodate it within your budget.
It's a point we frequently emphasize to our clients : meticulous planning is crucial for navigating through periods of inflation and rising interest rates. Ideally, your living expenses should be met by your AVS pension and your pension fund income.
As for the third pillar, you have the option to either draw an annuity or withdraw a lump sum of capital. While an annuity provides a consistent monthly income, withdrawing capital can offer more flexibility during inflationary times, allowing for additional funds when needed.
This approach gives you greater planning flexibility, but it also comes with the risk of return fluctuations. The financial planners at your private bank are ready to offer advice and tailor a solution to your specific needs, taking into account the prevailing economic climate.
Difficulty : debt ratio and mortgage during retirement
Excluding the funds in the third pillar, retirement typically results in an approximate 30% decrease in income. This reduction can be challenging for retirees who still have mortgage payments to meet. The dilemma remains: should you retain or pay off the mortgage ?
An interesting fact to consider is that upon retirement, when recalculating the mortgage affordability, mandatory amortizations are omitted since the loan-to-value ratio must not surpass 65%. Nonetheless, the issue of the debt ratio persists, which could potentially be addressed through renegotiating your contract and restructuring the debt.
Paying off your mortgage during retirement : good or bad idea ?
Paying down your mortgage can reduce your interest payments and may seem like an attractive way to lower your debt ratio. However, this is not always the most beneficial move for homeowners.
Utilizing your retirement funds to pay off your mortgage might lead to a proportional decrease in your pension income. This, in turn, could result in a less favorable debt ratio calculation. Hence, it’s crucial to have a detailed discussion with your bank before deciding.
Moreover, by using your savings to pay off or reduce your mortgage, you diminish your financial flexibility and the liquid capital available for other needs, such as leisure, home improvements, or unforeseen circumstances. Therefore, it's advisable to preemptively plan for interest rate increases as part of your serious retirement planning.
It's also vital to consider the tax implications of such a decision. Mortgage interest is deductible from your taxable income, so you should weigh this factor in your decision-making process to assess whether investment opportunities could offer more benefits than the after-tax cost of your mortgage financing.
Saron mortgage or fixed rate mortgage: what's the difference ?
In an era marked by volatile financial markets and soaring reference rates, it's natural to question your financial strategy. One should consider if there are enough savings to cover mortgage payments should interest rates increase.
The Saron mortgage carries inherent risk due to its fluctuating rate, which is recalculated daily. The "Swiss Average Rate Overnight" is determined by the SIX Swiss Exchange from approximately a hundred transactions involving 160 insurers and banks.
Conversely, a fixed-rate mortgage provides a stable and contractual promise, offering more security. Its interest rate is set for a specified period and remains unchanged throughout the contract's term. In the current financial climate, this option may provide greater peace of mind, albeit potentially at a higher cost over the long haul.
Fixed rate mortgage : choosing security
If maintaining a mortgage during retirement is necessary, opting for a fixed-rate offer is advisable for predictability. Regardless of market volatility or fluctuations in interest rates, you're assured a consistent monthly payment until maturity. Given the current financial environment, this option is evidently less risky. However, it's not without drawbacks. A Saron mortgage could be a viable alternative if you're able to amortize the credit without compromising your mortgage's viability and your liquidity requirements.
What happens if the mortgage is terminated prematurely ?
Locking in an interest rate for a long-term mortgage can entail risks, primarily for non-retirees who might face unemployment or become unable to work, leading to the risk of premature contract termination. While less common for retirees, it can still happen due to decreased income or health issues necessitating costly care. In such scenarios, banks typically require the payment of a penalty, which compensates for their loss of anticipated interest earnings.
For those with a constrained budget, it's safer to opt for a fixed-rate mortgage. If you have a financial cushion, you might consider sticking with a Saron mortgage, which can be more beneficial over the long term.
Piguet Galland bank provides a variety of investment solutions to guide you in making an informed decision and to support you throughout your retirement. Discuss your options with our wealth management experts.
To learn more about our financing offers, we invite you to check our dedicated page.
