Taking out a mortgage: a step-by-step guide

Taking out a mortgage: a step-by-step guide

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09.12.2020 | 2 minutes

Switzerland has a relatively high price level for building land and real estate in general. Very few individuals and families are able to finance the purchase of a property with their own savings. Most of them are dependent on a mortgage from a bank. In the case of owner-occupied homes, it is common practice for 80 percent of the price to be financed by a mortgage at the time of purchase. 20 percent is covered by the clients’ own funds.

Mortgage: what does it mean?

Hypotheca in Latin means a pledge or deposit. To simplify things slightly, a mortgage is a loan that is secured by a mortgage lien. If the client doesn’t meet their financial obligations, the bank’s claims are covered by this mortgage lien. In the event of payment default, the bank has the right to “realize” the property, i.e. to sell it. The mortgage is a loan secured by the property.

Why take out a mortgage?

When setting out on the property ladder, most people start by asking themselves: how much money have I saved up? What can I afford? The prices of building land and property have risen sharply, especially in popular locations and in large conurbations. Often, anyone not lucky enough to have a considerable fortune at their disposal, or to have come into one by inheritance, can’t even afford a plot of a land with their own savings. In practice, hardly any purchases are made without the buyer taking out a mortgage. Interest rates are currently extremely low, which is another argument in favor of financing your property with a mortgage.

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Taking out a mortgage: obtain a mortgage in six steps

Buying a property and taking out a mortgage result in long-term obligations. The basic rule is: first budget and plan, then buy. The lender charges interest on the mortgage and the capital usually has to be repaid to a certain extent. This is called amortization. That’s why it’s important to familiarize yourself with different types of mortgage, potential financing partners and the cost implications.

1. Set an overall budget

Interest rates on savings have hardly ever been as low and mortgages as inexpensive as they are now. No wonder real estate is highly valued in this environment. But be careful: the property and any associated longer-term costs for interest, amortization, incidental expenses and building maintenance must also be factored into your budget.

What a buyer can afford always depends on two components: available savings and income. The following “golden rule” is particularly important: the fixed costs for interest, amortization, incidental expenses, building maintenance etc. may not exceed the threshold of one third of gross income. The interest rate to be applied is not a daily reference rate, but a longer-term average interest rate of five percent.

Other fees and transaction costs must also be taken into account. For example, fees are incurred for issuing or modifying a mortgage certificate (for securing the mortgage). The tariffs charged by local land register offices, notaries etc. are controlled at cantonal level. The cost of simply issuing a mortgage certificate can quickly reach three or four digits (it is usually measured in thousandths of the purchase price).

2. Select a type of mortgage

The chosen mortgage and the duration of the fixed-interest-rate period will determine the longer-term costs. The financial possibilities, situation in life and individual goals of the borrower must be taken into account. Is the aim to keep the property for the foreseeable future or to sell it in the next few years? The duration of the contract and of the fixed-interest-rate period should be adjusted accordingly.

Secondly, the risk profile is extremely important: if, for example, a family attaches great importance to having a fixed budget and security, it would be better to opt for a longer-term fixed-rate mortgage. This type of mortgage offers ideal protection against surprises and a possible rise in interest rates.

Other short-term mortgage models should be considered if the borrower has a greater risk appetite and capacity. SARON mortgages or money-market mortgages are interesting when interest rates are moving sideways or falling. However, they are associated with greater risks of short-term fluctuations. Tip: in practice, various models and terms can often be combined in multiple tranches.

3. Pay attention to interest rates

The interest rate offered by the bank is rightly considered to be the essential basis for making your decision. Depending on the amount of the loan, a difference of 0.3 percent points over the entire term can total several hundred or thousand francs. But be careful: non-binding reference rates and “window-dressing prices” should not be confused with offers for a specific loan application.

Sometimes a supposedly low price only applies to very specific transactions – for example mortgages for limited amounts or for a specific group of clients.

In a normal “interest environment”, the following simple rule applies: additional security costs money. A higher interest rate will be due for a very long interest hedge with a fixed-rate mortgage taken out over a term of 10 or 15 years. However, in the current environment, the delta has narrowed between interest rates for very short-term models and those for longer-term models.

Expectations regarding interest rate trends also play a role. Before deciding on a mortgage strategy, it therefore usually makes sense to discuss your individual situation with your client advisor.

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4. Compare providers

It is not only a matter of obtaining an offer with the most attractive interest rate that corresponds to your individual situation. The following criteria are also important:

  • Do I want a contact person who is flexible and (almost) always available? Online platforms often provide extended opening hours, offers can be obtained around the clock, and discussions can be held regardless of location.
  • Does the financing partner provide a comprehensive range of mortgages? What about flexibility, cancellation provisions and subsequent mortgage extensions?
  • How much personal advice do you need? For example, anyone building a house on a plot of land themselves or buying an apartment off plan may want extra assistance.

Digitization and competition in the mortgage sector are opening up a variety of new opportunities. key4 makes it possible to compare and combine offers from different providers so that the client can remain flexible and enjoy interest rate advantages. This not only applies when they take out a mortgage for the first time. They can also benefit from the transparency, comparison options and flexibility of key4 when extending their mortgage at a later date.

5. Clarify the costs

Sales and cost models will be very different depending on whether you approach your existing house bank, another bank, a broker or an online provider. Many mortgage providers today don’t charge any fees at all when a client applies for and takes out a mortgage. The costs are settled as part of the contractually agreed interest payments.

Online platforms promise particularly attractive interest rates due to their efficient business model. And it’s usually possible to compare offers and take out a mortgage free of charge on online platforms.

6. Submit a loan application

What practical steps are necessary to apply for a mortgage? The lending business is subject to due diligence obligations and industry standards. Every bank and every lender is obliged to check all documents very thoroughly. A loan must not lead to over-indebtedness; the client is only given the green light for a mortgage if all the conditions are met.

The client must therefore inform the bank about their financial situation and prepare a certain number of documents relating to the chosen property. For a loan application, you will need to supply information on income and equity (based on salary statements, tax returns and other documents) as well as documentation about the property including construction and floor plans, a Land Register extract, the year of construction and area specifications. Depending on the provider, original documents may need to be submitted rather than copies. More and more lenders now also accept documents via a protected online channel.

Conclusion: realize your dreams step by step

Taking out a mortgage is a big decision. You should allow yourself time to thoroughly clarify points such as your own budget, the right type of mortgage, mortgage providers and potentially hidden costs. It’s also worth keeping your documents and records organized.

This gives you the best chance of realizing your dream of owning your own home.


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