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 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.
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:
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.
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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:
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.
Read our article "What you need to know about mortgages before buying a house".
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.
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:
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.
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:
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:
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.
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.
Hire-purchase or rent-to-buy is a rental agreement that includes an option to purchase. With this arrangement, you can rent a house or apartment today and secure the option to buy it later, typically within a five to ten-year timeframe. You'll only need about 10 percent of the property's value as equity capital, making monthly rent payments, and saving funds throughout the contract period in preparation for taking ownership at the contract's conclusion, often by securing a mortgage. The entire purchase price for the option is credited at 100 percent when you assume ownership. Your advantages: you
