Mortgages: What you need to know about buying in Switzerland

Are you planning to buy property in Switzerland? Have you already spotted a villa, chalet or flat that tickles your fancy? Then the question of financing arises: you need to take out a mortgage with a Swiss bank. But to do this, you need to know that Swiss mortgages have a few special features. What are they? What criteria are taken into account when granting a mortgage in Switzerland? FGP Swiss & Alps answers your questions.

(This article relates to the financing of a current property for own use, i.e. intended to be used as a principal residence by its owners).

What is a mortgage in Switzerland?

In Switzerland, a mortgage is a conventional loan to finance the purchase of a property (house, flat, chalet, villa, land, etc.). A Swiss mortgage is granted by a financial institution which, in return for the sum lent, takes the property as collateral to cover the risk of non-repayment.

As a borrower, you are giving the lender (the bank) the right to seize your home and sell it at auction if your commitments are not honoured. In practice, however, this procedure is rare: in the event of default, the bank will do its utmost to find an amicable solution.

How does a Swiss mortgage work?

To fully understand a Swiss mortgage, you need to keep three concepts in mind: the division of the debt into two parts, the choice of repayment method, and the type of mortgage.

A two-part loan

For security reasons, property loans in Switzerland are divided into two parts: first and second mortgages (or debts).

– The first-rank mortgage is the “secured” part of the loan: in the event of a forced sale, the bank is guaranteed to recover its investment. The first-ranking mortgage represents two-thirds of the value of the collateral (66%). Repayment of this part of the mortgage is not compulsory, but you pay interest on this sum throughout the term of the loan.

– The second mortgage is the part of the loan that must be amortised (repaid). It represents one-third of the collateral value, less the equity already committed (i.e. 14%). It must be repaid within a maximum of 15 years or, at the latest, at the age of 65. It is characterised by higher interest rates.

For simplicity’s sake, banks often round up the first mortgage to 65% and the second mortgage to 15% of the price, plus the 20% equity. However, this practice is tending to be replaced by a uniform first mortgage rate. Depending on your equity and the guarantees you offer, this option can be discussed with your bank.

Amortisation method

There are two repayment options for Swiss mortgages, or to be more precise: second mortgages.

– Direct repayment involves reducing the debt with each repayment, with interest gradually falling. This is the equivalent of the amortising loan used in many countries. This may seem the most appropriate solution, but there is one factor to bear in mind: in Switzerland, interest on debt is tax-deductible. In other words, the higher your debt, the less tax you pay.

– Indirect repayment involves placing the monthly repayments in a third-pillar savings account (voluntary savings). This is a special feature of Swiss mortgages. Both the amount of the debt and the interest remain constant throughout the term of the loan. Once the loan has matured, the sum required for repayment is transferred to the mortgage account. There are three advantages to this solution:

◦ Mortgage interest is tax-deductible throughout the term of the loan.

◦ Payments into the third pillar are deductible from income, up to an annual limit – and these savings are not subject to wealth tax.

◦ The interest generated by savings is higher than the interest you pay on a mortgage in Switzerland.

Type of mortgage

The main difference between the different types of mortgage lies in the type of rate charged. There are three different rates for a mortgage in Switzerland.

– Fixed-rate mortgage. This is the most common model for buying a home for own use: it is backed by a fixed-term loan. Charges remain fixed for the duration of the loan, which is ideal for families who want to keep financial risk to a minimum. Charges may apply if the loan is repaid before the end of the term.

– Variable-rate mortgage. With this type of mortgage, the rate varies according to market trends. It is riskier and more suitable for speculative property purchases. There is no fixed term to the loan, so it can be cancelled easily (within 3 to 6 months).

– The Saron mortgage. Saron” is the acronym for Swiss Average Rate Overnight, the benchmark used by the Swiss National Bank and commercial banks to lend money to each other. In this model, the rate is calculated overnight. The bank revises the rate applicable to the loan every three months. This rate is generally more attractive because loans are granted for short periods (3 or 5 years), with the possibility of renewal. This can be interesting if, for example, you are expecting a large influx of cash in the near future, or if you are planning to sell at the end of the interest period.

What are the conditions for taking out a mortgage in Switzerland?

Let’s take a look at the conditions under which a bank can grant a mortgage in Switzerland. Three main factors are taken into account: the value of the property, financial capacity and equity.

The value of the property

The value of the property is independent of the price set jointly by the seller and the buyer. To determine it, the bank systematically makes its own estimate, the result of which is called the “collateral value” and corresponds to the amount that will be granted under the Swiss mortgage loan.

– When the bank’s estimate is equal to or higher than the sale price, the loan is granted.

– When the bank’s estimate is lower than the sale price, the amount of the loan is calculated by taking into account the value of the collateral. You then have three options: increase your equity, apply to another bank, or persuade the seller to revise his estimate (which becomes essential if several banks arrive at the same result).

Please note: in addition to the purchase price, you will need to pay the notaire’s fees, which include fees, land registration fees and transfer taxes. These amount to between 3% and 5% of the value of the property, and vary from canton to canton. Bear in mind that these costs are not included in the calculation of the mortgage loan in Switzerland, and that you will need to provide additional funds to cover them.

Financial capacity

Financial capacity determines whether you are able to cover all the living expenses associated with owning and maintaining your home. It is calculated on the basis of your income. For a mortgage loan in Switzerland to be considered affordable, the annual sum of charges must not exceed one-third of the applicant’s gross annual income (33%). These costs include mortgage interest, debt repayment, ongoing maintenance costs and other household expenses.

Example for a property worth CHF 1,000,000, giving rise to a mortgage loan of CHF 800,000, of which CHF 150,000 is the second mortgage, plus CHF 200,000 of own funds. The household earns CHF 180,000 a year. Annual expenses must therefore not exceed CHF 60,000 for the loan to be approved.

A special feature of Swiss mortgages is that, when calculating the current mortgage costs for fixed-rate mortgages, the bank does not take into account the actual rates, as they vary from day to day. Instead, it uses a theoretical rate of 5%, which allows it to anticipate a possible rise in rates. For the borrower, this means security.

Shareholders’ equity

Finally, when taking out a mortgage in Switzerland, it is customary for the bank to lend no more than 80% of the value of the property. This is known as the “advance rate”.

The balance must be made up of personal funds, or ‘own funds’: at least 20% of the purchase price for a principal residence, of which 10% must come from savings other than the second pillar (occupational savings). This rule is imposed by the supervisory bodies, the Swiss Banking Association and FINMA. It applies in all the cantons of the Confederation. Please note that you must add the 5% due for notary fees, which are not covered by the loan.

The sum to be injected can therefore come from your savings (at least 10%), from your savings (second or third pillar), from a donation, from a property you already own, etc.

As you can see, there are very specific rules governing mortgages in Switzerland, and it’s essential to be familiar with them if you want to buy a property here. Our advice is as follows: don’t just contact a bank, but use a broker to help you with the process.

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