The Ultimate Guide to Swiss Mortgages
Are you thinking about buying a gorgeous home in beautiful Switzerland?
We completely understand you, a beautiful cabin in Verbier would be a great choice for the winter holidays. If you are so keen on making this step, maybe it is time to think about the Swiss mortgage system and what steps you need to take to buy a new home.
This guide has everything you need to know about the system, mortgage rates, rates forecast, mortgage market, and all the important rules that concern taking out a loan in this country.
How do mortgages work?
The Swiss system has rigorous lending rules. In other words, applicants have a difficult time securing a mortgage with a small deposit.
But once an applicant acquires a mortgage, monthly repayments are very manageable. To be exact, Swiss mortgage terms and conditions are usually longer when compared to other countries.
Moreover, Swiss banks often offer a mortgage of up to 80% of the current market value of the property. Translated into simpler terms, it means that an applicant has to pay a deposit of 20% and at least 10% has to be put down in cash while the other 10% (or more) can be arranged using one’s pension fund.
Also, keep in mind that repayment periods can be quite long with deals lasting between 50 and 100 years.
However, what most foreigners find amazing is the fact that in Switzerland most people never repay their mortgages and one can keep 65% of the debt on their property forever.
Swiss mortgages are also usually split into two mortgages. The first one covers up 60% to 70% of the purchase price and has an indefinite repayment period while the second mortgage covers the gap between the first mortgage and the deposit, has a fixed repayment period, and a higher interest rate.
Keep in mind, though, that this kind of mortgage increases your taxes, but since the interest rates are very low, there is not much value in reducing them. Instead, it is wiser to invest in stocks than in a mortgage. Additionally, should a person reduce their mortgage, their net worth will increase and that means paying more taxes on their wealth.
All in all, it may be wise to not repay the mortgage. In most cases that is a logical thing to do in Switzerland.
Swiss mortgage rates
Potential applicants are usually taken aback by how low mortgage rates are on the Swiss mortgage market.
Mortgage rates in Switzerland have dropped to historic lows in recent years costing as little as 1% following the lowering of the Euribor rate. Average five-year mortgage rates have dropped to 1% and 10-year rates are just 1.35%.
Keep in mind that mortgage rates can vary considerably from bank to bank. They are influenced by one’s personal conditions and financial background. Hence, it pays off to ask around in more than one bank.
If you’d like to, you can determine the cost of a mortgage using a Swiss mortgages calculator such as this one.
How much money can you borrow?
Let’s see how Swiss banks determine the amount they are willing to lend to applicants.
First of all, there are a few rigorous rules that are directly linked to an applicant’s income level. In general, a person with a higher income can look for a higher mortgage.
Seeing the current record-low rates, one can assume that they can afford a mortgage on luxury houses, and the affordability computation is done using theoretical rates.
The idea behind this concept is that the bank does not want to lend you money if you cannot afford a hike in rates. Therefore, Swiss banks are currently using a 4.5% theoretical interest rate as a reference.
Some banks are even using a 5% sample rate. Additionally, the banks are accounting for 1% amortization per year. Depending on the bank, they will account for between 0.5% and 1% in maintenance costs.
So, in theory, if the rates are high, there is a high limit on a person’s capacity to get a loan. Also, once the bank has determined the total cost of your property, the total has to be lower than 33% of your income.
Generally, the mortgage will be as high as 80% of the property value.
How much money do you need for a downpayment?
You need to understand that the bank will not provide the complete value of the house as a mortgage. Instead, the applicant has to pay a part of the value of the house in advance, which is called a downpayment.
This policy is meant to motivate people to save for a house, as the government doesn’t want to make it too easy for people to get a house if they are not capable of nesting any amount of money.
In most cases, one has to pay 20% of the value of the house in advance, so the mortgage will be 80% of the value of the house. One could also have a larger downpayment, but it is not always beneficial to do so in Switzerland.
Additionally, at least 50% of the downpayment has to be in cash. The rest can come from one’s retirement fund and one can withdraw money from their second pillar and their third pillar.
Individuals that are younger than 50 can withdraw the entire second pillar. If that is not the option for some, they can withdraw the amount they had in the second pillar when they were 50.
Logically, this kind of action reduces the retirement income. Also, when it comes to the second pillar, you will not be able to deduct voluntary contributions from the taxable income.
First, a person has to repay for the withdrawal. The voluntary contributions that have been made in the previous three years can’t be withdrawn for a real estate property.
People that don’t have 10% of the property in cash still have some options. But if they can’t obtain the needed amount, they should reconsider the whole plan to buy the property.
Keep in mind that the downpayment is not the only item on the list that has to be paid in cash.
When buying a property in Switzerland, you need to take care of various other fees. These include but are not exclusive to notary fees, property transfer fees, real estate acquisition taxes, and so on.
In general, a buyer can expect to pay about 5% of the property value in extra fees. It is very important to have these fees in mind, since buyers will need to pay them in cash. In some situations, various banks may accept to take this into the mortgage, but that rarely happens.
Hence, it would be best to be ready to pay 25% of the property value before planning to buy a real estate property. And 15% should come in cash, not in retirement assets.
Bear in mind that various specific types of mortgages vary between lending institutions. However, you should expect to see the following types:
- LIBOR mortgage loan (linked to LIBOR, the global benchmark interest rate)
- Capped-rate mortgages
- Bridging loans
- Offset mortgages, usually using funds deposited into a third pillar pension account with the same bank to offset interest paid on the mortgage
- Fixed-rate mortgages
- Variable-rate mortgages
Take an in-depth look into these more popular mortgage types below.
This is the most frequently used mortgage in Switzerland, probably because it is very simple.
An applicant fixes the interest rate for a specific number of years. For instance, an applicant could get a 1.2% fixed-rate mortgage for 20 years. It means that during these 20 years, they will pay 1.2% interest on the debt every year.
The LIBOR mortgages
This mortgage type follows the LIBOR reference interest rate.
Its duration is short (one to five years) along with the frequency of change (from one month to 12 months). If you have a frequency of one month, your interest rate shall be adapted to the LIBOR rate every month.
The variable-rate mortgages
This is the third most popular mortgage type.
The variable-rate mortgage has no duration. The interest rate is variable, but the rates are considerably higher.
It is fair to say that this mortgage type is slowly decreasing in popularity because the rates have become lower in the past few years, so it makes little sense for people to use this kind of mortgage nowadays.
Do you qualify for a Swiss mortgage?
If a person lives in Switzerland with a residency permit B (for EU/EFTA countries) or a residency permit C (for non-EU/EFTA countries), they can apply for a mortgage and purchase property in the country of Switzerland.
However, if an individual doesn’t hold a residency status, it is a bit complicated to buy a property. According to the Lex Koller law – which limits purchases of Swiss property for foreigners – non-residents have to apply for a license to buy from their cantonal authority. There are also boundaries on secondary home purchases in some areas.
Moreover, the mentioned law states that non-residents can only buy investment properties for vacation purposes, and some cantonal authorities place quotes on the number of flats and apartments that can be purchased in the area.
Hence, to get a mortgage as an expat in Switzerland, one has to prove their residence and how they will afford repayments. Also, they need to provide evidence of the deposit.
Finally, keep in mind that there are quotas in Switzerland that stipulate how less than 20% of homes can be seen as holiday homes. Also, potential buyers cannot rent out homes for the whole year (only periodically) and foreigners cannot invest in real estate in Switzerland, but they can buy a house.
In Switzerland, when a person takes out a loan, they have to repay 15% of the mortgage in the first 15 years.
Therefore, every year, an individual pays 1% of the value of the mortgage (not the value of the property). This money will get removed from the loan and the interest paid up every year decreases over time for the first 15 years.
If a person pays more than 20% through the downpayment, they have a smaller amount to amortize. It is necessary to have the loan to be only 65% of the value of the house in the first 15 years.
As you can see, the process is not very complex and there are two amortization methods similar to amortization methods in most developed countries.
Direct amortization means giving money to the bank to reduce your debt. The concept is quite simple, all the money a person pays reduces their debt and the interests are reduced too.
This is the standard amortization method that is used in most other countries too.
Indirect amortization means amortizing through a third pillar. Contrary to giving money to the bank, a person invests money into their third pillar. If they fail to pay the interests, the bank gets the right to access the third pillar funds. Once the retirement age comes, the bank uses the money to amortize the mortgage.
Indirect amortization can also be done with a third pillar in life insurance. It is possible to keep the current insurance policy and invest in it instead of amortizing the debt.
The bank will then have a right to the insurance money if necessary. But keep in mind that when you amortize indirectly, the debt is not reduced and the same interest remains.
It is essential to learn as much as possible about mortgages and loans in Switzerland if you are planning to buy property there. This guide covers all fundamental tips of advice and if you manage to learn every bit from this article, you will know more than most people do.
Hence, before you start looking for your dream Switzerland home, make sure to study Swiss mortgages. Good luck!