Equity: how much do you need for a mortgage? - key4.ch

Equity: How much do I need for a mortgage?

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21.04.2021 | 3 minutes

One million francs. That’s how much the average owner-occupied home with 120 square meters of living space costs in Switzerland, according to the UBS Swiss Real Estate Focus (2019). And a luxury property can easily be six times more expensive.

If you want to buy real estate in Switzerland, you will need deep pockets. For that reason, buyers normally need to take out a mortgage. But what criteria should lenders use to decide who qualifies for a mortgage?

Prospective buyers have to fulfill two basic requirements: First, they must be able to contribute sufficient resources – or equity – of their own. Second, their income should be high enough to cover the cost of the property in the long term. As a general rule, the imputed costs (kalkulatorische Kosten) of home ownership (amortization, interest, maintenance costs and incidental expenses (Unterhalt- & Nebenkosten) should not exceed one-third of the gross income.

How much equity do I need?

There is no absolute minimum amount of equity that you have to provide. Rather, the amount is always based on the market value of the purchased property as calculated by the mortgage provider. As a basic rule, however, at least 20% of the value of the property must be covered by your own equity. You can take out a mortgage to finance the remaining 80%. The first mortgage covers up to two-thirds of the property value and a second mortgage can be taken out to cover the rest. In contrast to the first mortgage, the second mortgage has to be amortized (repaid).

What counts as equity?

When an average Swiss person hears the word “equity,” they think first and foremost of savings and personal accounts. However, the sale of securities and valuables and the redemption of insurance policies also count as equity and are therefore worth examining. Likewise, inheritance advances (Erbvorbezüge) and gifts from family members can inject additional liquid funds. It is important to point out that you can use all of your retirement savings that would otherwise be tied up in pillar 3a of the Swiss pension system to purchase a home, provided you will live in the home yourself.

A younger and an older person looking out a window together.
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All funds from the sources mentioned so far count as “hard” equity. Home buyers have to provide at least 10% of the value of the property in this form. So, how can you find the rest of the 20% that you need? You can raise the final 10% of the equity you need by making an advance withdrawal of pension assets (Vorsorgegelder) from your pillar 2 pension fund (Pensionskasse). However, because early withdrawals are subject to tax, and your pension fund will pay out lower benefits on retirement, it is advisable to carry out a pension analysis (Vorsorgeanalyse) beforehand. Furthermore, there is a limit on the amount that may be withdrawn after the age of 50.

Example: Possible components of equity

A single-family home has a market value of one million Swiss francs (CHF).
The buyer’s equity must amount to 20% of the value of the property, i.e. CHF 200,000.
No more than 10% of this may come from the pension fund pillar 2).

Source

Total amount (CHF)

Comment

Personal account

10,000

Savings account

50,000

Proceeds from sale of securities

10,000

If you are considering selling securities, you should keep an eye on the state of the financial markets.

Inheritance advance

50,000

Inheritance advances or gifts may also benefit the buyer’s parents, for example, from a tax perspective.

Early withdrawal from pillar 3a

30,000

All pillar 3a funds count as “hard” equity.

Advance withdrawal of part of the pension fund assets (Pensionskassengeld)*

50,000

In this example, 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

From an equity perspective, a mortgage can be granted.

*The minimum amount of pension provision (Vorsorgekapital) that can be withdrawn from the pension fund is CHF 20,000.

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Does it make sense to contribute more than 20% of the purchase price from my own funds?

If you have more savings, you can provide more equity than you need to. However, today’s mortgage rates (the cost of external borrowing) are historically low and it may be more profitable to invest your money elsewhere. Whether keeping your mortgage “small” pays off at the bottom line is therefore a question of overall financial strategy.
Prospective buyers who count on getting a certain mortgage because they are able to put down a deposit of 20% on their dream 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 worth only CHF 1 million, the buyers must either pay the CHF 100,000 difference from their own capital or negotiate a lower asking price.

Are there any exceptions to the rule?

The 20:80 rule and the option to withdraw pension assets only apply to the purchase of owner-occupied residential properties. Different regulations apply to the purchase of vacation homes and luxury properties. In this case, buyers have to cover at least 40% of the price of the property with their own equity.

In the end, each person’s situation and each property is unique. For this reason, financing must always be considered individually from a variety of perspectives.

Do you have any questions about equity? Our client advisors are here for you.

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