How much equity do you need to finance your property purchase in Switzerland?

In Switzerland, obtaining a mortgage loan for the purchase of a principal residence necessarily requires an injection of equity capital. This represents at least 20% of the value of the property, including 10% that does not come from occupational pension provision (or^2nd pillar). So how much equity do you need to finance the purchase of your property? FGP Swiss & Alps can help.

How does equity work in a mortgage?

In Switzerland, it is customary for the bank to lend 80% of the amount required to purchase a property for own use. This loan is made up of a first mortgage (approximately 65% of the value of the property) and a second mortgage (approximately 15%). The remaining 20% is the so-called “equity”: the capital that the buyer must raise to finance the project.

This 20% equity is compulsory. It breaks down as follows:

• At least 10% of equity comes from savings or other sources of finance. This is sometimes referred to as “hard equity”.
• The remaining 10% is taken from the^2nd pillar (occupational pension provision).

Please note: to this 20%, you must add the funds needed to cover the notary’s fees. Depending on the canton, these vary between 3% and 5% of the value of the property. In practical terms, this means that you need to be able to inject up to 25% of the amount borrowed to obtain a mortgage.

What are the sources of equity capital?

When you plan to buy a property in Switzerland, the question of equity necessarily arises. Where do you find the money you need– the 10% that doesn’t come from business savings? The good news is that it is possible to mobilise different sources to reach the required amount. We’ve listed the main ones below. But be warned: these solutions only apply to the purchase of a property for your own use.

Your personal savings

This is the first source of equity you might think of: the money you’ve put aside over the years. This money can be sitting in an account (current or private) or in a safe, or it can come from your savings. However, it’s best not to commit all your savings to your mortgage: remember to keep a small reserve to cover any unforeseen circumstances.

Your individual pension provision (^3rd pillar)

The capital from your personal pension savings can be used to top up your own funds when applying for a mortgage. The law gives you the right to use Pillar 3a capital to finance your principal residence. Money placed in a pillar 3b account can be used as you wish. Bear in mind that withdrawals from your^3rd pillar are taxed, so it’s a good idea to gradually replace the money that will be there for you when you retire. Alternatively, you can pledge the capital without withdrawing it.

A loan granted by a third party

A loan from a third party can help you increase your equity. This could be a family member, a friend, a work colleague, or even your employer. The condition is that the loan is interest-free and has no repayment period: otherwise, the amount borrowed will be included in the debt taken into account by the bank when calculating your financial capacity.

A donation or an advance on an inheritance

To help their children become homeowners, many parents agree to help increase their equity. This can be done by making a donation or by advancing the inheritance (an advance on the future share of the inheritance). Please note: the sum donated or advanced may be taxed depending on the degree of kinship and the canton.

Your life insurance

If you have a life insurance policy, you can surrender all or part of it to build up your own funds. To be viable, the surrender value must be attractive. It is also possible to pledge the policy.

Your financial assets

Your equity can also come from your portfolio of assets: securities, shares, bonds, investment funds, etc. You can sell them if their price is high, or choose to pledge them: this is the principle of “Lombard credit”.

A property or plot of land

Do you own another home or a building plot? A property can be pledged as collateral: the bank takes its market value into account when calculating the equity contribution.

A mortgage increase

Do you have a relative who owns their own home? They can ask to increase their mortgage, and pay you the difference between their new mortgage and their old one. Please note: this will have an impact on their interest rate.

Your valuables

Jewellery, gold and other precious metals, valuable furniture, works of art… You can increase your equity by selling or pledging any valuable items in your possession.

Personal work

If you have building or renovation skills and are planning to carry out work on the property you are buying, this can be counted as a personal contribution.

How can I unlock my occupational benefits?

As explained above, 10% of equity capital is drawn from occupational pension provision, or the^2nd pillar. However, the use of these savings is highly regulated. To use it, you need to meet a number of conditions:

• Have saved a minimum of CHF 20,000.
• Obtain your spouse’s agreement if you are married.
• If the property is resold before retirement age: repay the capital withdrawn from the mortgage into the same savings account.

Another condition is linked to your age: if you are over 50 when you apply for the loan, you can have the amount available to you when you turn 50, or half the amount held when you took out the loan.

Another option is to use pledging as collateral rather than withdrawing money from the^2nd pillar. In this way, you can borrow up to 90% of the value of the property. The advantage is that the capital remains in savings and continues to generate interest. But this option is reserved for high earners.

Finally, some professions do not have compulsory occupational pension provision: entrepreneurs, craftsmen, the self-employed, the self-employed, etc. In this case, you can replace the 10% of the^2nd pillar with a mortgage guarantee taken out with a cooperative – albeit at a high cost.

You now know which sources to use to find your own funds, and thus unlock your mortgage. Finally, you should know that it can be worthwhile injecting more than the required 20% into the mortgage: this is a particularly effective way of negotiating a favourable interest rate.