Financial capacity: definition

Your financial capacity refers to your ability to sustainably cover all costs related to your home (interest, amortisation, maintenance, other debts) without jeopardising your budget or exceeding the debt limits set by banks and insurance companies.

The key question is: “Up to what level of monthly housing costs can your household reasonably go while still keeping reserves for unexpected events and other projects?”.

Lending institutions do not just look at your current income and today’s interest rate. They apply a prudent financial capacity test to check whether you would still be able to pay your mortgage if interest rates rose or your expenses increased slightly. Strong financial capacity requires stable income, a healthy debt structure and sufficient room in your budget after all fixed costs.

How do Swiss banks calculate financial capacity?

To assess your financial capacity, banks (lenders) generally add together:

Theoretical mortgage interest: calculated using a deliberately high stress interest rate (often around 4.5–5 %) rather than the current market mortgage rate.
Amortisation: the portion of principal repaid each year so that the mortgage is reduced to about 65 % of the property value within a typical period of 15 years.
Maintenance costs and running charges: often estimated at roughly 1 % of the property value per year (for example maintenance, minor renovations, PPE/condominium charges).

The sum of these three components should in principle remain below roughly one third of your annual or monthly gross income. If your total housing costs exceed this threshold, your financial capacity is considered insufficient and the bank may require more equity, a cheaper property or refuse the financing.

Other factors taken into account

Beyond this standard calculation, the analysis of financial capacity also includes:

Your other loans (car leasing, credit cards, personal loans).
Alimony payments or other recurring commitments.
The structure of your income: fixed salaries, variable bonuses, self-employment, pensions (variable components are often taken into account cautiously, and sometimes only partially).
Your age and family situation (proximity to retirement, dependent children).

The goal is not only to satisfy a formula, but to make sure that your property project remains affordable in the long term, even if your circumstances change or interest rates rise.

Detailed example of a financial capacity calculation

Let’s look at a concrete example to illustrate the concept of financial capacity:

Property price: 1 000 000 CHF
Equity: 200 000 CHF
Mortgage amount: 800 000 CHF
Household gross income: 10 000 CHF per month (120 000 CHF per year)

The bank calculates the theoretical housing costs as follows:

Theoretical interest (stress rate 5 %)
- 800 000 CHF × 5 % = 40 000 CHF/year ≈ 3 333 CHF/month
Amortisation (e.g. 1 % per year down to 65 % of the value)
- 800 000 CHF × 1 % = 8 000 CHF/year ≈ 667 CHF/month
Maintenance and charges (e.g. 1 % of the property value)
- 1 000 000 CHF × 1 % = 10 000 CHF/year ≈ 833 CHF/month

Total theoretical housing costs: 3 333 + 667 + 833 ≈ 4 833 CHF per month.

In parallel, the bank applies the one-third rule:

1/3 of monthly gross income: 10 000 CHF × 1/3 ≈ 3 333 CHF.

In this example, theoretical housing costs of 4 833 CHF clearly exceed the limit of 3 333 CHF. Your financial capacity is therefore deemed insufficient in the strict sense and, in this configuration, the project would generally not be accepted.

To make the project financeable, several options are possible:

increase your equity (e.g. more liquid assets or 2nd pillar pension funds) to reduce the mortgage amount;
choose a cheaper property, for example 800 000 CHF instead of 1 000 000 CHF;
reduce other debts (leasing, loans) to ease the strain on your budget.

Conversely, if for another property the theoretical housing costs are only 2 800 CHF per month while the one-third limit based on your income stands at 3 333 CHF, your debt ratio remains within an acceptable range.

How to improve your financial capacity

If your project is close to the limits or slightly above them, here are some ways to improve your financial capacity:

reduce existing debts before submitting your mortgage application;
increase your equity, for example through savings, pension funds (2nd pillar / 3rd pillar, subject to the rules) or family support;
rethink your project budget: size, location, type of property, in order to reduce the purchase price and therefore the mortgage;
stabilise your income (e.g. moving from a temporary to a permanent contract, limiting highly variable income).