The Ultimate Guide to Swiss Mortgages

Are you thinking about buying a gorgeous home in beautiful Switzerland?

Indeed, a beautiful cabin in Verbier would be a great choice for the winter holidays. If you’re keen on making this step, maybe it’s 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 in Switzerland work?

The Swiss system has rigorous lending rules. In other words, applicants have a difficult time securing a mortgage with a small deposit.

However, once an applicant acquires the right 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.

To repay or not to repay?

Most foreigners find it amazing that in Switzerland most people never repay their mortgages and one can keep 65% of the mortgage debt on their property forever.

Swiss mortgages are also usually split into two mortgages. The first one covers up 60-70% of the purchase price of the property 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, in case a person reduces 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, it’s a logical thing to do in Switzerland.

Mortgage Switzerland: Do you qualify?

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, this 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 mortgage 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 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.

Swiss mortgage interest rates

Potential applicants are usually surprised by the low mortgage rates on the Swiss market.

A few years ago, mortgage rates in Switzerland dropped to 1%, but the reference mortgage slightly increased and now stands at 1.5%, which is still rather low compared to other countries. The reference mortgage rate is valid for determining rents throughout Switzerland.

Additionally, thanks to the strong economy and currency in Switzerland, the inflation rate is low, which is a good sign that the interest rates should also remain low.

Nevertheless, keep in mind that mortgage rates can vary considerably from one bank to another. They are influenced by one’s personal conditions and financial background. Hence, it pays off to ask around in more than one bank.

Both Credit Suisse and UBS provide benchmark mortgage interest rates, offering a valuable reference point when contrasting with rates in your home country. As of April 2021, the mortgage rates are as follows:

• Fixed-rate mortgages range from 1% (for a 2-year term) to 1.8% (for a 15-year term).
• The interest rate for variable-rate mortgages stands at 2.8%.
• SARON mortgages are set at 1.05-1.10% for a one-month duration.
• A construction loan carries an interest of 2.6%, accompanied by a credit commission of 0.25% every quarter.

If you’d like to, you can determine the cost of a mortgage using a Swiss mortgage 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% annual amortization. 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 Swiss 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.

Here’s a loan example for your reference: 

Property value:	CHF 1,000,000
20% deposit:	CHF 200,000
Mortgage:	CHF 800,000
5% interest (sample rate):	CHF 40,000 per year / CHF 3,340 per month
Principal repayment at 1% of loan amount per year (typically repaid for first 15 years of mortgage)	CHF 8,000 per year / CHF 670 per month
Additional costs (1% of property cost):	CHF 10,000 per year / CHF 850 per month
Total costs:	CHF 58,000 per year / CHF 4,850 per month

How much money do you need for a downpayment?

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’re not capable of earning enough 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 who 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 who 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 property.

Additional fees

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’s 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.

Mortgage types

Bear in mind that various specific types of Switzerland mortgages vary between lending institutions. However, you should expect to see the following types:

• Fixed-rate mortgage
• Variable-rate mortgage
• LIBOR mortgage loan
• Bridging loan
• Offset mortgage

Fixed-rate mortgage

With fixed-rate mortgages, your interest rate stays constant throughout the mortgage’s life. This structure ensures that your repayment amount doesn’t change, providing stability for financial planning. 

However, if interest rates fall, you won’t reap those benefits, potentially leading to higher costs compared to other mortgage options. These mortgages require a more expensive initial setup and have a maximum fixed-interest duration, after which rates may be less advantageous. In Switzerland, these terms could extend up to approximately 15-20 years.

Instead of completely paying off their mortgages, Swiss homeowners often use fixed-rate periods as a strategic phase before transitioning to variable rates or renegotiating their terms. Advanced arrangements, known as forward or future fixed-rate mortgages, are also available, securing terms for a deal that starts later.

Variable-rate mortgage

Unlike their fixed-rate counterparts, variable-rate mortgages adjust interest rates over time. Initially, they might offer lower rates, but the uncertainty can lead to increased payments if the global economics leads to rising interest rates. 

There’s more flexibility in switching mortgage types, but the absence of a minimum repayment contributes to longer mortgage durations, sometimes extending beyond 50 years in Switzerland.

LIBOR/SARON mortgage

LIBOR mortgages used to be linked to LIBOR, the global benchmark interest rate. They are commonly used internationally and have variable rates but with interest adjustments occurring at specified intervals. 

These short-term loans, usually up to 5 years, have predefined rollover periods. However, Swiss institutions are transitioning from LIBOR to SARON mortgages, which function similarly but rely on the domestic money market.

Bridging loan

For individuals purchasing a new home before selling their current one, Swiss lenders provide bridging loans. These short-term financial aids, covering up to 75% of the new property’s value, require repayment strategies, especially if the anticipated property sale falls through.

Offset mortgage

This mortgage type usually uses funds deposited into a third-pillar pension account with the same bank to offset interest paid on the mortgage

Some institutions in Switzerland offer an innovative mortgage option where borrowers can link their mortgage with other in-house accounts, like savings or pension accounts. The balance in these accounts offsets the interest on the mortgage, potentially shortening the mortgage term.

Green mortgage

Reflecting global environmental concerns, more Swiss lenders are now offering “green” mortgages. These special plans incentivize energy-efficient home purchases or eco-friendly renovations by offering interest rates significantly lower than their traditional counterparts, sometimes by up to 0.8%.

Special-purpose mortgage

Swiss lenders feature specific loans catering to various needs, including:

• Construction loans for new home building, convertible into regular mortgages post-construction.
• Commercial mortgages, with diverse rate options, for purchasing business properties.
• Renovation loans with favorable interest rates, designated for home improvements, typically ranging from CHF 100,000 to CHF 250,000.

Mortgage renewal process

With the exception of variable-rate mortgages, most mortgage types come with a specified term. Upon reaching the end of this term, you’re faced with the mortgage renewal process. This essentially means reevaluating and selecting a new mortgage plan. 

If interest rates have declined, you’ll have the opportunity to secure a new mortgage at these lower rates. Conversely, less favorable market conditions might mean higher costs.

You should choose based on your current financial situation. A change in personal finances may require a different type of mortgage.

Renewal time also presents the possibility of switching lenders. If the terms offered by your current bank don’t meet your expectations, consider using competitive offers from other institutions. This leverage could motivate your bank to propose better terms.

It’s crucial to understand that renewals involve a thorough reassessment of your finances by the bank, similar to the initial property purchase assessments. If they determine your finances to be insufficient for sustaining a new mortgage, you may be pressed to sell your property.

Banks might be accommodating with minor financial setbacks, but it’s best to be careful. Opting for an extended mortgage term could be a wise move if a decrease in future income is anticipated.

Navigating mortgages through retirement

Acquiring a home as retirement nears means that you can retain ownership into your non-working years.

Previously, we emphasized that mortgage renewal involves a reassessment of your financial health. Failure to meet the bank’s criteria could lead to having to sell your property, a risk that persists even into retirement.

Retirement typically coincides with a reduced income, complicating the approval for debt. Sufficient retirement income eliminates these concerns, but if finances are tight, there are some alternatives.

One strategy is debt amortization. Although potentially complicated tax-wise, it’s an effective method to reduce debt, securing your home throughout retirement.

Alternatively, involving your children (if applicable) is an option. One approach is selling them your home pre-retirement and leasing it back, or they could vouch for the property, assuming financial responsibility if repayment becomes unfeasible. While not ideal, it’s practical depending on financial circumstances.

Ultimately, proactive retirement planning is advisable to avoid complications. Ensuring enough post-retirement income stream is crucial to maintaining any mortgage commitments.

Mortgage providers: Banks vs insurances

Interestingly, in Switzerland, not only banks but also major insurance companies provide mortgage services. 

Typically, insurance companies specialize in fixed-term mortgages, extending some attractive long-term contract options. 

Moreover, a notable distinction is that many insurers don’t permit the use of retirement funds for down payment. This means you’ll need to have at least 20% of the property price for the downpayment, which is a challenge for many potential buyers

If your finances allow it, or if you prefer not to utilize retirement funds, it’s best to explore both insurers’ and banks’ terms.

Amortization

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.

There are two amortization methods similar to those in most developed countries – direct and indirect amortization.

Direct amortization

This is the standard amortization method that is used in most other countries. Direct amortization means giving money to the bank to reduce your debt. The money you pay reduces your debt and the mortgage interest is reduced too.

Indirect amortization

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 interest, 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.

Using retirement funds to purchase real estate: Withdrawal vs. pledge

A unique aspect of employing retirement funds in mortgages is choosing between withdrawal and pledging.

Withdrawing means directly paying the seller, thereby reducing your debt as it’s subtracted from your second or third pillar.

On the other hand, pledging keeps your own funds in your account, serving as the bank’s collateral. This method increases your overall debt because, despite pledging 10% of the property value, you incur a debt of 90%, resulting in higher interest and more to amortize.

Withdrawal appears more beneficial initially, but pledging ensures:

• Continuation of your retirement income
• Opportunity for tax-beneficial contributions to your second pillar
• Reduced tax due to higher interests
• No immediate taxation on withdrawn funds (though future taxes do apply)

That being said, when choosing between these strategies, here are a few factors you should be taking into account:

• Your ability to pay higher monthly payments
• Marginal tax rate
• Second pillar’s returns
• Preference for voluntary contributions
• Years left before retirement

The two approaches don’t vastly differ. Individuals who are near retirement may find the decision crucial. However, younger people with subpar second pillars might find withdrawal more beneficial, allowing for higher monthly savings and potentially better investment returns.

Final thoughts

It is essential to learn as much as possible about mortgages and loans in Switzerland if you are planning to buy property in this country. This guide has covered all the fundamentals and if you learn all the information from this article, you will know more than most people do.

So, before you start looking for your dream Switzerland home, make sure to study Swiss mortgages so you can find the right mortgage. Good luck!