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The financial burden resulting from the construction or purchase of a property must be bearable, even in times of economic crisis. A mortgage is a loan granted against the pledge of a property. The value of the pledge is estimated by the financial institution. The financial capacity of the mortgage is calculated by the mortgage lender. The personal financial situation of the buyer is also taken into consideration.

Construction loan

A construction loan is granted to pay the costs of building, converting or renovating a property. It is a short-term bank loan. The interest on a construction loan is higher than the interest on a mortgage. Once the construction is completed, this credit is consolidated into a mortgage.

What is a mortgage?

If you take out a mortgage, you will be pledging your property as security for your mortgage loan to the financial institution (bank, insurance company or other). A mortgage is a long-term loan. If you are unable to pay the mortgage interest or repayments, the financial institution can take you to court to realise the mortgage, i.e. to finally sell your property at auction.The mortgage is established in the form of an authenticated deed, i.e. with a notary.

How much equity?

For all properties, equity can come from your bank accounts, a donation, an inheritance advance, a private loan or the sale or pledging of securities (shares, bonds, investment funds). The amount of equity needed depends, among other things, on your personal financial situation, including your income.

Primary residence

20% equity is required, of which 10% can come from your pension fund. You can use the 10% from the pension fund either by making an advance payment or by pledging it. After the age of 50, you can use either the entire vested benefit to which you would have been entitled at the age of 50 or half of the vested benefit at the time of withdrawal. The higher amount can be withdrawn or pledged. Ask your pension fund for more information.

In addition, you have the option of using the assets from your tied personal pension plan (Pillar 3a). If the annuities exceed 1/3 of the income, you must have more equity.

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Second home

In principle, you need to have 35-40% of your own funds and you cannot use your pension fund and tied personal pension assets (pillar 3a).

Investment property

The purchaser must have at least 25% equity and the acquisition costs should be added (calculate with 5% of the purchase price). You cannot use the 3rd pillar and pension fund assets to finance it. The yield value is calculated for the financing. All costs as well as depreciation and mortgage interest must be covered by the net rental income. The return on equity is to be calculated.
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Commercial premise

To finance commercial premises, hotels, offices, industry: banks normally require between 30 and 50% equity. The financial capacity depends on the activity and the cash flow of the company.

Which mortgage model to choose?

Each institution offers different mortgage financing models. Most financial institutions offer the following models:

Fixed-rate mortgage

the mortgage rate is fixed for a certain term (e.g. 2 years or 10 years), the advantage is that you know the rate for the whole term, but if you want to terminate the mortgage before the end of the term, the financial institute will ask you for an indemnity or an exit penalty. The longer the term, the higher the amount you have to pay.

Variable-rate mortgage

The mortgage rate has a variable term, can be adjusted according to the capital market and can often be terminated with a 3 or 6-month notice period.

SARON mortgage (Swiss Average Rate Overnight)

The interest rate is fixed on a daily basis. The mortgage is often concluded for a period of 3 to 5 years. In recent years, the interest payable on a SARON mortgage has been the most favourable for the debtor.

Amortization

A distinction is made between:

Direct amortization

You repay a set amount each year, for example 2% of the value of the total mortgage, and your debt and mortgage interest are reduced as you repay.

Indirect amortization

You pay the amortization amount into a 3rd pillar pension account with a bank or life insurance company. The mortgage debt and the amount of interest to be paid do not decrease. You pledge the 3rd pillar pension fund and the mortgage will be amortised at maturity. You can repay the mortgage at a later date through an early withdrawal or upon retirement.

To find out whether direct or indirect repayment is more favourable, I suggest that you calculate the tax savings in the case of indirect repayment and compare the amount of the savings with the amount of the mortgage interest. The higher your income and wealth, the greater the tax savings.

Constant amortization

The debt decreases in a linear fashion. Interest is charged on a decreasing debt.

Fixed annual instalments

The annual financial charges to be paid (interest and amortization) remain constant over the entire term of the contract.

Splitting

A mortgage can be divided into several tranches with several instalments. Splitting can be interesting if the interest rates rise so that the financial charges do not increase for the entire amount at once. It is almost impossible to change the financial institution and the negotiation of tranche extensions puts the debtor in a weak position.

Who finances?

A property can be financed by a bank, an insurance company, a pension fund, a private loan or shareholders.

How to look for financing

To look for financing, you can contact your trusted financial institution or a financing broker. Some financial institutions do not grant mortgages for certain properties, e.g. your pension fund will not finance a second home or an investment property with your pension fund. Universal banks finance all properties and also grant building loans.

Mortgage application

Financial institutions lend up to 80% of the estimated mortgage value. The annual instalments (interest, maintenance costs and depreciation) should not exceed 1/3 of the income for financing a main residence. Feasibility calculations are often made with theoretical mortgage rates of 4.5% or 5%.The mortgage application must be well prepared and documents must be provided to the financial institute. A non-exhaustive list can be found here: Mortgage loan - application

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© Written by Esther Lauber, Real Estate Trustee with Advanced Federal Diploma of Professional Education and Training, real estate agent, property broker and manager in Carouge Geneva, translated with www.DeepL.com/Translator (free version)