Most residential property costs between CHF 1,500,000 and 2,500,000, irrespective of location or condition. The current average prices per square meter for single-family homes and condominiums can be found in the Swiss Real Estate Offer Index.
Buying a home means investing a lot of capital, which is why a mortgage is generally necessary. But what are the requirements for obtaining a mortgage?
There are two basic prerequisites for obtaining a mortgage: First, prospective buyers must have sufficient funds of their own, i.e., equity. Second, your income must be high enough to be able to afford the property in the long term. This is referred to as the affordability of the mortgage. As a general rule, the imputed costs of owning a property (amortization, interest, maintenance costs and incidental expenses) should not exceed one-third of your gross income.
You can find more information about mortgage affordability in our article.
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Capital or equity is money that you yourself can contribute towards the cost of residential property. The more equity you have, the smaller the mortgage. And the smaller the mortgage, the lower your monthly mortgage interest costs.
The amount of equity you require is based on the market value of the property to be purchased as determined by mortgage providers. There is therefore no absolute minimum amount. However, the following principle can be used as a guide: you’ll need to contribute at least 20 percent of the value of the residential property as equity. The remaining 80 percent can be financed with a mortgage. A first mortgage can cover up to two thirds of the purchase price, the rest being financed with a second mortgage. Unlike the first mortgage, the second mortgage must be amortized within 15 years or before you retire by making regular repayments. For more about amortizing a mortgage, click here.
Up to 10 per cent of equity can come from an early withdrawal from your occupational pension scheme or pension fund (pillar 2). The requirement is that you live in the property yourself. The remaining 10 percent must be financed using “hard” equity, which can include the following:
When talking about equity, many people primarily think of savings and checking account balances. These savings can be accessed without restriction. Nevertheless, it is important to keep some money in reserve, for example to cover additional costs in the event of a renovation.
The proceeds from the sale of securities such as shares or investment funds can also be used as equity. However, be careful of sudden price changes, so that the securities are not sold at a loss.
Another option is to pledge securities. This will allow you to benefit from interest rates on the capital market and lower mortgage interest rates, but you’ll also have to accept the risk of a fall in prices, which can jeopardize the affordability of your property.
Insurance policies can be pledged in the same way as securities. The surrender value of the policy is credited at between 60 and 90 percent. As equity, the advantage of these assets is that you don’t have to amortize the portion of your mortgage covered by the pledged assets. However, you usually have to repay the pledged amount to your lender all at once at the end of the financing period.
Gifts or an advance inheritance also qualify as equity. However, note that the compulsory portions of any other heirs must not be violated. It is also important to remember that gifts and advance inheritances are taxable in some cantons. Find out in advance whether this applies to you and allow for any possible tax payments.
Another option is to borrow money from family or friends. In this scenario, you will have to include the repayment and interest installments in the affordability calculation.
Hard equity includes savings in pillar 3a, which can be either withdrawn early or pledged. However, remember that an early withdrawal from pillar 3a can have tax implications. By contrast, pledging this money entitles you to higher tax deductions. Consider your strategy very carefully before making your decision.
Up to 10 percent of the equity required for a mortgage can be provided by making an advance withdrawal of pension fund assets from pillar 2. As a consequence of this early withdrawal, the pension fund reduces the retirement benefits and, if necessary, the risk benefits. In addition, the early withdrawal is usually taxable. To avoid a possible pension gap, the amounts withdrawn can be paid back later. It is always advisable to carry out a pension analysis before making a decision.
It is easier to pledge the retirement assets as additional collateral, in which case the money is still available to provide for your retirement. However, to do so the funds used must be amortized before you retire.
A single-family home has a market value of CHF 1,000,000.
The buyer’s equity must be 20% of the value of the property, i.e., CHF 200,000.
No more than 10% may come from their pension fund (pillar 2).
Source |
Total amount (CHF) |
Remarks |
Personal account |
10,000 |
|
Savings account |
50,000 |
|
Proceeds from sale of securities |
10,000 |
Someone considering the sale of securities should consider the current state of the financial markets. |
Early inheritance |
50,000 |
An advance inheritance or gifts may also benefit the buyer’s parents, e.g., from a tax perspective. |
Early withdrawal from pillar 3a |
30,000 |
Pillar 3a funds count as “hard” equity. |
Advance withdrawal of part of the pension fund assets* |
50,000 |
Money from the pension fund makes up 5% of the value of the home. The maximum permissible amount would be 10%. |
Total available equity |
200,000 |
The property is financed using the buyer’s own money. |
*The minimum amount of pension capital that can be withdrawn from the pension fund is CHF 20,000.
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If you have more savings, you can raise more equity than is actually needed for a mortgage. When deciding whether or not to contribute more equity, the level of mortgage interest (debt financing costs) is very important. If mortgage interest rates are low, a lower loan-to-value ratio may not be worthwhile. In addition, the money could be invested a different way and perhaps more profitably. Whether using equity to keep your mortgage “small” makes sense is a question of overall financial strategy.
Prospective buyers who count on getting a certain mortgage before buying a home may be in for an unpleasant surprise. This is because the amount you can borrow is not determined by the “catalog price” of the property, but by the current market value as determined by the mortgage lender. For example, if the asking price for a single-family home is CHF 1.1 million but the mortgage lender decides that it is only worth CHF 1 million, the buyer must either pay the CHF 100,000 difference out of their own pocket or negotiate a lower price.
The 20:80 rule and the option to withdraw pension assets only apply to the purchase of owner-occupied residential properties. Different rules apply for other real estate like vacation homes and luxury property for which an equity share of 40 percent is generally required to be able to take out a mortgage.
In the end, each person’s situation and each property is unique. The financing of a home must always be considered on an individual basis and from various angles.
Do you have any questions about mortgages and equity? Our client advisors will be happy to advise you.
Capital or equity is money that you yourself can contribute towards the cost of your property. The more equity you have, the smaller the mortgage required to finance a home of your own. And the smaller the mortgage, the lower your monthly mortgage payment.
Up to 10 per cent of equity can be obtained by making an early withdrawal from your pension fund (pillar 2). The remaining 10% must be financed from “hard” equity:
The following basic principle can be assumed: At least 20 percent of the value of the property must be contributed as equity. The remaining 80 percent can be financed with a mortgage loan. The amount of equity is based on the market value of the property as determined by mortgage providers. There is therefore no absolute minimum amount.
