How your credit rating influences the mortgage conditions
Anyone who wants to buy or build a home usually needs borrowed capital. Financial institutions provide this in the form of mortgages. Mortgages are loans that are secured by real estate. The prerequisite for this is that you pass the credit check: in addition to the property, your financial and personal circumstances are decisive.
What does creditworthiness mean?
Creditworthiness or credit standing describes the probability that a customer will repay a loan. You are creditworthy if the lender classifies you as trustworthy, reliable and “willing to pay”. To this end, the customer’s financial trustworthiness is scrutinized. This includes, for example, past payment history, but also outstanding debts and any debt enforcement or collection measures.
In order to clarify this, various statistical “risk factors” are scrutinized in the creditworthiness check. These include, for example
- Age
- nationality
- Residence status
- Length of stay in Switzerland
- Frequency of changes of residence
- Frequency of job changes
To determine creditworthiness or credit standing, lenders also contact the Central Office for Credit Information (ZEK) and consult, for example, the debt collection register and debt collection agencies for further information.
What is the difference to creditworthiness?
A person is creditworthy if they are legally capable of concluding credit agreements. For example, they must be of legal age. However, the creditworthiness check also analyzes the borrower’s financial situation: it must be possible to repay the loan on time. In addition, the granting of a loan must not lead to over-indebtedness. The precise rules are set out in the Consumer Credit Act (KKG). During the creditworthiness check, a budget calculation is made and the borrower’s expenditure is compared with their income. The expenses include, for example
- Housing costs
- Health insurance premiums
- taxes
- Existing obligations (e.g. alimony, maintenance)
- Costs of commuting to work
Who checks creditworthiness?
Applicants undergo a credit or creditworthiness check for every loan application. This is a prerequisite for the granting of a mortgage loan. After this examination of the financial circumstances, the credit rating of the person submitting the application is determined. This rating determines whether you receive a mortgage and – if so – what the conditions are. This involves the loan amount, the term and the interest rate.
How is the credit rating determined?
It determines the conditions of a mortgage: if you achieve a high rating and are classified as creditworthy, you pay less interest on your financing. Those who do not achieve the best rating in all criteria must accept a risk premium. Applicants must submit all documents with which all factors that influence the rating can be examined.
What factors determine the credit rating?
Roughly speaking, it is determined on the basis of various factors, with the first three being particularly important, namely
- Affordability (percentage of gross income that buyers have to spend on the property)
- Loan-to-value ratio (ratio of mortgage to loan-to-value of the property)
- Amount of the mortgage
- Collateral (e.g. other properties, life insurance or guarantees)
Can you calculate the credit rating yourself?
No, the details of the lender’s calculations are not public. However, the underlying basic data is known
your income
The amount of the borrower’s current income plays an important role. The key employment data is also checked. How high is the workload? Are both parties in a couple employed? How secure is the income? Is there a risk of unemployment?
Your assets
Another important factor is your own funds: How much equity is available? Have you earned your own funds or do they come from an inheritance or a private loan? The pension situation is also examined (for example, will the pension fund or pillar 3a be used for the purchase?)
Your expenses
Current financial obligations (leasing, alimony, debts, interest liabilities) and the savings rate are also checked. The family situation is also considered: For example, are there any children who need to be supported?
Your property
For the credit rating, however, key data relating to the property to be purchased is also checked: If the purchase price is not in line with the market from the lender’s point of view, a separate estimated value is calculated. It is examined how quickly a property can be resold in an emergency and how great the risk of a reduction in value is in the future. The age and condition of the property and the level of maintenance and ancillary costs are also included in the assessment process.
Tip
As a rule, an imputed interest rate of 5 percent is used for affordability. This means that it is checked whether it is also guaranteed with a rising interest rate or a lower salary. Calculate the affordability and loan-to-value of your desired property with our mortgage calculator.
How to improve your credit rating
A low loan-to-value ratio and good affordability improve your rating the most. These are the factors that you can change to improve your mortgage conditions:
- Loan-to-value ratio: the lower your debt to home value, the better your credit rating and the lower the lender’s risk. For example, if you only take out a 1st mortgage (65 percent of the property value), you will benefit from a significant interest rate reduction.
- Affordability: The more income you can claim and the lower the running costs for interest and maintenance, the better your values are in terms of affordability.
