Mortgage renewal at retirement age and affordability rules

The 80-year-old client turned to the Ombudsman with concern. His mortgage would expire in 2027, and he feared that it would not be renewed due to a lack of affordability. Together with his wife, he had followed the statements published in the press by FINMA regarding the granting of mortgages by banks. FINMA criticized the numerous exception-to-policy cases in the banks’ mortgage portfolios where the relevant rules are not being observed. These reports had reinforced the client’s concern that his own financing might be at risk.

The 80-year-old client addressed an issue that many homeowners face in connection with retirement. Because property values have risen sharply in recent years, the maximum loan-to-value ratios for mortgages are generally not a problem. However, the sustainable affordability of the burden for interest and maintenance can become a problem due to the often reduced income in retirement. The Ombudsman repeatedly receives such inquiries from concerned clients.

The client particularly criticized the high notional interest rate, which in his opinion was set by FINMA and no longer corresponded to the actual interest environment. He demanded that the Ombudsman provide him with the relevant regulations so that he could form his own opinion of his situation. His concern was not unfounded: After an initial summary assessment, his mortgage did in fact constitute an exception-to-policy case in which the standardized affordability criteria were narrowly not met.

The Ombudsman first explained the legal background of the provisions to the client. The regulations in question are not directly requirements of FINMA, but rather the ‘Guidelines for the examination, assessment and processing of mortgage-backed loans’ and the ‘Guidelines on minimum requirements for mortgage financing’ of the Swiss Bankers Association. These are part of the self-regulation of the financial sector but have been recognised by FINMA as a minimum standard and coordinated with the National Bank.

The Ombudsman explained the affordability calculation in detail: A notional interest rate of 4.5 to 5.0 percent is used for the mortgage debt, which is significantly above the current interest rate level. The reason for this is that affordability must also be ensured if the interest rate level is higher. In addition, maintenance costs of 0.75 to 1.0 percent of the estimated property value are added. The amount calculated in this way should not exceed one third of the gross income.

The Ombudsman tried to put the statements of FINMA into context for the client: To his knowledge, the supervisory authority had expressed concern about the high number of exception-to-policy cases in the banks’ mortgage portfolios. However, these concerns were not primarily directed at the segment of owner-occupied residential property as in the present case. Clients who have fulfilled their obligations under the mortgage for decades and for whom, due to their age, it is foreseeable that the property will change hands in a few years, are probably not the main focus of FINMA.

The Ombudsman made it clear that he could not decide whether the mortgage posed a problem for the client’s financial institution. The granting or renewal of a mortgage is a business policy decision that each financial institution may make itself on the basis of contractual freedom. A bank may also refuse a mortgage even if all guidelines are complied with.

However, based on his assessment, the Ombudsman did not assume that the client had anything to worry. He pointed out the strong competition in the mortgage market and recommended that the client obtain and compare offers from various financial institutions in good time before the expiry of their fixed-rate mortgage. Additionally, he recommended that in the event of any difficulties, he should contact specialized institutions that advise people of retirement age on alternative financing options for their properties.

The Ombudsman provided the client with the requested guidelines and closed the file with the confidence that the proactive approach and timely preparation would help the client find a suitable financing solution for his property.