Switzerland is still a tenant country. 40% of the inhabitants live in their own homes. This is low by international standards. However, as owning is cheaper than renting thanks to low mortgage interest rates, more and more people are considering buying a house or flat. To do this, they need money: at least 20% equity and capital borrowed from a bank, insurance company or pension fund. What should you know about mortgages if you want to buy a residential property for the first time?
No customer is the same. That is why there is no one-size-fits-all mortgage. The ideal financing depends on the customer's financial scope, risk tolerance and wishes, and takes into account the current situation and prospects on the capital and money markets. In Switzerland, two main mortgage models are offered: Fixed-rate mortgages and money market mortgages. Variable-rate mortgages, which were the most common type of mortgage up to 20 years ago, are now rarely offered or demanded. That is why we do not talk about it.
4 out of 5 mortgages taken out today are fixed-rate mortgages. The duration and interest rate are fixed at the time the contract is concluded. Terms from 1 year up to 15 years are common, some banks offer terms up to 20 years. Currently, the average term of a fixed-rate mortgage is 10 years. The interest rate depends on the capital market.
You cannot eliminate disadvantages. However, you can divide your mortgage into tranches with different terms and reduce the risk of having to extend a mortgage for the full amount during a period of high interest rates. Two or three tranches make sense. In this way you are independent of interest rate fluctuations and have more budgetary security than with a money market mortgage.
Interest rates for money market mortgages are based on Libor (London Interbank Offered Rate) until the end of 2021. Most banks use the 3-month or 6-month Libor rate as a base rate and add a margin, depending on the borrower's creditworthiness. The framework contract for the money market mortgage usually has a duration of 3 to 5 years.
You can exclude this disadvantage if you take out a money market mortgage with a cap. This interest cap cannot be exceeded during the term of the basic contract. You therefore pay a premium. This only applies, if at all, to longer maturities, because the National Bank's monetary policy is stable and interest rates cannot fluctuate so strongly in the short term.
At the end of 2021, the Swiss Average Rate Overnight is likely to replace Libor as the base rate for money market mortgages. The Saron is an overnight rate - from today until tomorrow - and is calculated on the basis of more than 100 transactions. In order not to have to pay interest every day, the interest rate is calculated using the average of the daily compounded Saron rates for a fixed rate period. This is done retrospectively, so the mortgage interest rate is not fixed until the penultimate day of the interest period. As with Libor, the bank adds a solvency margin.
You can minimise your interest rate risk if you split your mortgage, i.e. if you take two or three tranches. This way you will not have to pay or extend the full amount if your mortgage expires during a period of high interest rates. However, the tranches should not be too small. With our mortgage partner key4 by UBS, for example, you can combine different mortgage models with different terms from different providers and choose the best offer for each tranche. In this way, you minimise your interest rate risk, adapt the financing to your needs and optimise your financing costs.
Before talking to your advisor, you should calculate how much money you need. Banks lend up to 80 per cent for owner-occupied residential properties. This means that you have to put 20 per cent of the value of the property as equity. At least half of this must be so-called real capital, for example savings including pillar 3a assets, securities, inheritance withdrawals, private loans, personal contributions or building land. You can pledge or withdraw pension fund assets (pillar 2) up to 10% of the value of the property. If you want to buy a house worth one million francs, you need at least 200,000 francs of equity and can finance a maximum of 800,000 francs with a mortgage.
To calculate affordability, you need to establish interest, amortisation and additional costs in relation to your income. As a precaution, banks calculate with an imputed mortgage interest rate of five per cent and a percentage of the purchase price for additional costs. In order to be able to afford the house or flat, your housing costs must not exceed 35% of your gross household income. This is what our example calculation looks like:
You must (linearly) amortise your 2nd mortgage in 15 years or until retirement with equal payments:
If you amortise directly, you pay the second mortgage to the creditor. This reduces your mortgage debt and mortgage interest. Therefore, your tax burden increases because you can deduct less debt from your assets and less interest from your income.
If you amortise indirectly, you pay for the tied pension (pillar 3a). The mortgage debt and mortgage interest remain unchanged. You can therefore continue to deduct them from your assets and taxable income and thus optimise your tax burden.
Many debtors write off their mortgages indirectly because they want to save on taxes. If you expect interest rates to rise in the short to medium term, it may be worth writing them off directly, because the falling mortgage debt will partly offset the higher interest burden. Or when you gradually reduce your workload a few years before retirement and therefore earn less.
The banks and the Swiss Bankers Association have tightened the screws on lending. First, they have shortened the amortisation period to 15 years - and borrowers must repay their second mortgage on a straight-line basis. Previously, they were allowed to skip a few years or could repay the full amount at the end. In addition, properties are mortgaged according to the least cost or market principle. If you make a bargain and buy a house or flat below market value, you only mortgage the lower purchase price and no longer the higher market value. Moreover, second incomes are only taken into account in the calculation of affordability if both debtors are jointly and severally liable. Separation of ownership no longer works for mortgage debts.
Prepare well for the meeting with your advisor. Remember the documentation on the property and fill in all the documents on your financial situation: