Are you buying a property in Switzerland and financing this purchase with your own capital and the help of a mortgage? This is usually a decision with major financial implications. It is therefore important to be aware of the various aspects involved when taking out a mortgage. What do you need to bear in mind, what are the requirements and who can help you? Questions upon questions – this article provides the answers in a simple and understandable way.
A mortgage is borrowed capital in the form of a loan that is used to purchase real estate in Switzerland. Mortgages are granted by banks, insurance companies or pension funds. The real estate itself (building and land) serves as collateral for the mortgage. Mortgages are usually taken out for a specific term. Once this term has expired, another mortgage can simply be taken out.
Property prices in Switzerland are among the highest in the world. The average price for a flat is around CHF 800,000, and for a detached house as much as CHF 1.6 million. (Source: IAZI)
The vast majority of property buyers are not wealthy enough to cover the entire purchase price from their own funds. Therefore, in addition to equity capital, debt capital in the form of a mortgage is also used.
The most common rule of thumb is 20/80, whereby 20% is contributed as equity and 80% is taken out as a mortgage. For an 80% mortgage, the mortgage lender will require amortization in order to reduce the mortgage amount to 65% over the long term. In most cases, partial repayments (amortization) are expected over 15 years, i.e., 1% of the property value per year.
An example: The house is purchased for 1.5 million Swiss francs, 20% or 300,000 Swiss francs is equity, and 80% or 1.2 million Swiss francs is a mortgage. For the following 15 years, 1% or 15,000 Swiss francs must be amortized each year. The mortgage thus decreases by this amount each year, and the equity increases. After 15 years, the mortgage is still CHF 1.05 million and the equity is CHF 450,000 (in this example, we assume that the value of the house remains unchanged).
Equity capital is primarily freely disposable assets belonging to the buyer. These may be account balances or easily saleable securities. Very often, an advance inheritance forms part of the equity capital. Pension funds from the 2nd and 3rd pillars are also often used for the purchase. However, this is only legally possible if the property is for owner-occupied residential use.
Affordability refers to the ability of the property buyer to pay all running costs (of the property). These costs include mortgage interest and amortization as well as ancillary costs. All these costs should not exceed one third of the available household income. Read more about this in our article on affordability and lending.
The mortgage interest rate depends on the creditworthiness of the owner and the mortgage model.
Creditworthiness and credit rating are relevant factors for property owners. The better these criteria are assessed, the lower the mortgage interest rate.
When it comes to mortgage models, the following generally applies: the longer the term of a fixed-rate mortgage, the higher the mortgage interest rate. However, there are certainly market situations in which this rule does not apply. Your independent mortgage advisor can tell you more about this.
Whether now is a good time to take out a mortgage can only be assessed with certainty in hindsight. A long-term historical analysis often helps to get a feel for this. Our assessment of mortgage interest rates can also help.
It is not customary or even required that the mortgage be repaid in full. Instead, it can simply be extended after the contract expires. In most cases, it is and must be repaid in full when the property is sold.
An example: The house is sold for 1.5 million Swiss francs, and the mortgage is 1 million Swiss francs. The remaining and freed-up equity amounts to 500,000 Swiss francs.
The most common mortgage models for purchasing an existing property are fixed-rate mortgages and Saron mortgages. Fixed-rate mortgages are characterised by a fixed term and a fixed interest rate. Saron mortgages, on the other hand, have a variable interest rate. All other aspects, as well as the advantages and disadvantages of fixed-rate and Saron mortgages, can be found here.
If you are building or having a house or flat built (turnkey), you will usually need a construction loan. This construction loan is converted into a mortgage upon completion of construction, which is referred to as consolidation. You should consult with an advisor and specialist at an early stage if you are considering taking out a construction loan..
Once you have found your dream home, you will need a financing confirmation from your bank in order to draw up the purchase contract. Depending on the seller, the financing confirmation may be required at an earlier stage in the purchase process. It therefore makes sense to have this ready at short notice. Specifically, the confirmation of financing states that you and your bank will work together to purchase or finance a property. Consequently, a complete financing dossier and a mortgage commitment are prerequisites for confirmation of financing. Your mortgage advisors will help you obtain and implement these.
At the latest when the transfer of ownership takes place at the land registry office, you will also need an irrevocable promise to pay. This confirms that you or your bank will transfer the entire purchase price on the date of transfer of ownership. In order for your bank to issue such a promise to pay, signed mortgage agreements are usually required. The bank will then add the equivalent value of the mortgage to your own funds and transfer the total amount to the seller.
The team of experts at MY HYPOTHECA looks forward to an initial consultation.
Mortgage agreements consist of several individual documents. The product agreement specifies the chosen mortgage model with its term and interest rate. The second document is usually called a framework agreement and also includes notice periods, among other things. If you wish to change providers, you must remember to terminate this framework agreement as well, even if the fixed-rate mortgage is already due on a specific date. These and other details remain hidden from most mortgage borrowers, at least at first glance. If you do not want to struggle with studying the contracts in detail yourself, you can delegate this task to an independent broker such as MY HYPOTHECA.
MY HYPOTHECA is an independent mortgage broker based in Zurich. The public limited company was founded in 2021 and now has 10 employees and operates sites in Zurich, Bern and Basel. MY HYPOTHECA stands for fast and convenient processing of mortgage loans. The aim is to provide customers with valuable timeeinzusparen and all of you concernsrelated to real estate financing. Since commencing business operations, several thousand customers have been assisted in their journey to home ownership.
A frequently heard “Tip” from your bank: divide your mortgage into several fixed-rate tranches to minimise interest rate risk. In reality, however, dividing your mortgage into tranches is a kind of “shackle”. If the tranches are more than two years apart, it is virtually impossible to switch providers. Your bank will laugh all the way to the bank and can impose any interest rate it wants when you renew a tranche. Of course, this interest rate is then less than attractive.
There are a number of common mistakes. We will show you what you can do to avoid them:
Start the search for the right mortgage early. When purchasing a property, it is worthwhile to begin exploring your mortgage options as soon as you start your property search.
Get at least 3 offers and compare not only the interest rate, but also the maximum mortgage amount, amortisation and other conditions, as well as any fees for drawing up the contract.
If you decide against a mortgage comparison, you should at least renegotiate the offer from your bank. A discount of 0.2 to 0.3% per year is always possible. However, the bank will not simply give it to you; you have to ask for it.
Refrainfromatranchingand remain free to choose your provider.
When choosing a product, don’t just look for the lowest or most attractive interest rate, but also consider the question of how long you will hold the property. Selling a house with a fixed-rate mortgage that still has 8 years to run can be very difficult, if not impossible.
Let us help you. You don’t have to learn and do everything in life yourself. For certain aspects, a specialistcan be useful, who will assist you.
The mortgage market has changed significantly in recent years. New, innovative advisory providers and brokers are shaking up the scene and have already made a significant impact. When choosing the right mortgage advisor, it is worth reading previous customer reviews (e.g. on Google) and having a non-binding initial consultation before deciding which partner should support you in your search for the right mortgage. The right mortgage is much more than just the cheapest interest rate. Mortgage amount, tax considerations and pension analysis are just a few of the important aspects that only mortgage brokers actually consider independently and with you, the customer, at the centre of their attention.
Simply going to your local bank to take out a mortgage for the first time is an outdated practice. Obtain at least three different offers or delegate this time-consuming task to a specialist. They know exactly which provider offers the right overall package for your circumstances. Nowadays, finding the best mortgage involves much more than just looking at the interest rate.