How do I finance my residential property?

Owner-occupied homes are notoriously expensive in Switzerland. However, only part of the financing has to be paid directly out of one's own pocket; the rest is usually covered by a mortgage. What to bear in mind.

"Who can even afford a property at these prices?" This is a question that many have probably asked themselves, given the developments in the Swiss real estate market. According to the UBS Real Estate Bubble Index published at the beginning of May 2022, a household currently needs around seven years' income to be able to purchase a home in the mid-price segment. Even by Swiss standards, that's a lot: Since measurements began in 1982, this figure has never been so high.
And anyone hoping for a price correction in the near future is also likely to be disappointed: Forecasts by the consulting and research firm FPRE say that prices for both condominiums and single-family homes will rise slightly again this year, as brisk demand continues to meet limited supply. And there are no signs of a correction in the following year.

Equity regulations

But at least not the entire property must be financed with the saved assets. As a rule, equity makes up the smaller part of the financing. In Switzerland, however, at least 20 percent of the value of an owner-occupied property must be paid for through equity. These include funds in savings accounts, securities, inheritances, gifts or pension assets (how pension assets can be used to finance home ownership was explained in the July 2022 technical report).
However, if the equity ratio is less than 35 percent of the property value, there is a repayment obligation: Within 15 years or until retirement age, a mortgage of a maximum of 80 percent must be repaid to two-thirds of the property value. This repayment can be made directly or indirectly. In the latter case, money is paid into a pillar 3a account, which is then used to make the repayment when the account is closed.

Interest rate comparison is worthwhile

If the income is sufficient to obtain a mortgage, it is worthwhile to obtain offers from various providers. The mortgage interest rates quoted on brochures or websites are often just window dressing. With a little perseverance, negotiating skills and a good credit rating, better conditions can often be negotiated.
Last but not least, the right mortgage must be chosen: Basically, you can choose between a Saron mortgage and a fixed-rate mortgage with different terms. While the interest rate on a Saron mortgage is adjusted in the event of interest rate changes, with a Fix mortgage you have the agreed interest rate for sure over the term. Saron mortgages are generally less expensive, while fixed mortgages provide planning security.

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Hurdles in debt financing

In order to obtain outside capital in the form of a mortgage, the prospective buyer must, in addition to the equity requirements mentioned above, also pass the affordability calculation. Here, the mortgage lender, usually a bank or insurance company, checks whether the residential property can also be financed in the long term. The financing costs of the residential property may not account for more than about one third of the gross income.
For this affordability calculation, however, not the current mortgage interest rate is used, but usually an interest rate of 5 percent - after all, the mortgagee must also be prepared for a possible increase in interest rates. In addition, there are the maintenance and ancillary costs, which are calculated at approximately 1 percent of the market value of the property, as well as the amortization costs.

Example of an affordability calculation

The Swiss family wants to buy a home with a value of 1 million francs. They have saved 200,000 francs in their savings account and want to contribute this as equity. For the remaining 800,000 francs, they apply to Bank A for a mortgage. Bank A carries out an affordability calculation: At an interest rate of 5%, the annual interest costs would be 40,000 francs, plus the annual mandatory amortization of 8,667 francs, so that the debt capital share can be reduced from the current 80% to two-thirds of the property value after 15 years. A further 10,000 francs per year are calculated for ancillary costs. In total, the expense per year amounts to 58,667 francs. In order for Bank A to grant the mortgage, this expense must not exceed one third of the gross income. This means that the Schweizer family must have an annual gross income of at least 176,000 francs in order to obtain a mortgage.