Equity for House Purchase: Alternatives to a Savings Account

1.4.2021
  1. In Germany it is possible without equity capital
  2. Loan-to-value ratio and affordability in Switzerland
  3. What is considered equity in Switzerland?
  4. Alternative 1: Sell or pledge securities
  5. Alternative 2: Advance or pledge the 2nd or 3rd pillar
  6. Alternative 3: Advance inheritance or donation
  7. Alternative 4: Loans from family or friends

If you want to take out a mortgage for a house or flat, you need equity capital. Usually at least 20 percent of the purchase price or market value. What can you do if you don't have that much money on hand? We show all the ways you can increase your equity for buying a house.

In Germany it is possible without equity capital

In France and Germany, you could realise your dream of owning your own four walls without equity. Many German banks, for example, finance home ownership up to 100 per cent with so-called full financing. But only if the prospective homeowners earn enough and live in stable circumstances. Moreover, in most cases mortgages in Germany have to be paid back in full by the time of retirement or shortly thereafter. Due to the regular amortisation payments, the loan-to-value ratio gradually decreases from 100 to 0 percent - and thus also the risk for the financing partner. In Switzerland, only 2nd mortgages have to be repaid by retirement, 1st mortgages (loan-to-value up to 65 percent) do not.

Loan-to-value ratio and affordability in Switzerland

Buying a house without equity is impossible in Switzerland. The banks have established two self-regulatory measures that you must fulfil if you want to buy residential property:

  • Loan-to-value ratio: Banks loan residential real estate up to 80 percent of the purchase price or market value according to the lower of cost or market principle. If you buy a house for 1 million francs that is also appraised that high, the bank will finance 80 per cent of the purchase price - and you need 200,000 francs of equity. But if the bank values the house at 900,000 francs, it will finance 80 per cent of the valuation, i.e. 720,000 francs - and you need 80,000 francs more equity capital.
  • Affordability: Housing costs may not exceed 35 percent of gross household income. This includes imputed mortgage interest (5 percent), ancillary costs (1 percent) and amortisation (1 percent). If you have taken out a 1st and 2nd mortgage for your house for a total of CHF 800,000, you must earn at least CHF 160,000 per year.

Houzy Advice

Good to know

Stricter rules apply to holiday homes and flats. They are only mortgaged up to 60 or 70 percent and may not be financed with money from the 2nd or 3rd pillar.

What is considered equity in Switzerland?

Most people think of equity as money in a savings account. Of course, that counts and is an important part of financing. There are four alternatives to the piggy bank:

  1. You sell or pledge securities
  2. You withdraw the 2nd or 3rd pillar in advance or pledge it
  3. You draw on your inheritance in advance or have the money given to you as a gift
  4. You borrow the money from family or friends

Houzy Advice

Good to know

The more equity you bring in, the lower your housing costs. In return, you can deduct less debt interest from your income and less debt from your assets in your tax return.

Equity house purchase: Rural single-family homes Switzerland
If you want to finance a single-family home in Switzerland for CHF 1 million, you need at least CHF 200,000 in equity.

Alternative 1: Sell or pledge securities

You can sell shares, investment funds, bonds or other securities and increase your equity. However, if you sell at an unfavourable moment, you realise price losses or miss out on price gains. If you don't want to do that, you pledge assets. But there are two catches: banks usually only lend up to 50% on security deposits and lombard loan interest rates are higher than mortgage interest rates.

Alternative 2: Advance or pledge the 2nd or 3rd pillar

Self-occupied residential property can be financed with money from the 2nd and 3rd pillars. The 2nd pillar is the occupational and compulsory pension scheme, the 3rd pillar is the private and voluntary pension scheme. You have two options:

  1. Withdrawal in advance: The amount you can withdraw from the 2nd pillar is shown in the pension fund statement. Advance withdrawals have disadvantages for you. On one hand, your retirement capital and thus your payout will decrease and on the other hand, most pension funds reduce their benefits in the event of death and disability. No benefits are reduced in the case of pillar 3a accounts.
  2. Pledge: If you pledge your 2nd or 3rd pillar, your retirement capital and insurance cover remain intact and serve as pledge collateral for the mortgages. This allows you to mortgage the house or flat at a higher rate than 80 percent.

Houzy Advice

Good to know

If you use money from the pension fund as equity, at least 10 percent must be hard equity. This means saved assets or assets from pillar 3a.

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Alternative 3: Advance inheritance or donation

An advance inheritance or a donation is a good idea, especially for younger homeowners-to-be, to increase their equity. If your parents have assets and you would inherit the estate or part of it anyway, why not do it now when you can use the money? Three points are important:

  1. Advance inheritances and donations must be offset and taken into account in the subsequent division of the estate. Unless otherwise agreed. Your parents should put this in writing.
  2. The advance withdrawal or the gift may not violate the compulsory portions of the other heirs.
  3. Your parents should inform all heirs in order to avoid disputes in the probate proceedings.

Alternative 4: Loans from family or friends

Your parents, other relatives or good friends could grant you a loan. It is important to draw up a written contract that regulates, among other things, the amount, the interest rate, the term, the maturity and the repayment. Private loans have two disadvantages:

  1. If you fall behind with interest payments or repayment, it can put a strain on the relationship.
  2. Unless you agree otherwise, the lender may demand repayment of the full amount, including interest due, at any time within six weeks of the first demand.

Houzy Advice

Good to know

You can register a loan as a mortgage in the land register and better protect the lender. This is especially worthwhile for larger loans because it costs relatively much.

Houzy Hint

Tip

Stay away from expensive personal loans or other interest-bearing and repayable loans outside the circle of family and friends. If you still have too little equity, be patient rather than take up such offers.

Do you want to know how much equity you need for your dream house or flat and whether you can afford your own four walls? In your Houzy profile you can click on "Mortgage" under "Finances", calculate the loan-to-value and affordability for each property and compare mortgages from different providers.

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