Buying property in Switzerland

For many foreigners, it is natural to own their primary residence. This solution is not always possible in Switzerland since property prices are higher than in many other European countries. Here, some strict requirements apply for future disposable income and down payment. Without a penny in your pocket but even with a well-paid job it is impossible to buy property in Switzerland. The lender evaluates the risks as too high.

More tenants than owners in Switzerland
Characteristics of the Swiss housing market is that most private individuals live in rented accommodation. One reason is that apartments in Switzerland are offered in high quality. In addition, a complicated Rent Act provides good protection of a tenant against the landlord.

Does one intend to stay on a long-term basis in Switzerland, however, many foreigners of emotional reasons choose to buy a house or apartment. One should however firstly analyse the economic foundation in order to determine how expensive a property to buy. As it is the case in many countries, the purchase price will be determined based on criteria such as location, infrastructure, size and layout, tax rate in the area, etc.

The down payment/required equity constitutes 20% of the purchase price
The main rule when buying real estate in Switzerland is that 20% of the purchase price will be paid in cash by the buyer. If you cannot perform 20% down payment, part of the payment might be financed by pledging or withdrawing one’s savings in company pension or pension capital in Switzerland. The remainder, i.e. 80%, can be financed through a mortgage loan.

Affordable running costs
The running costs of the property to buy in Switzerland should not exceed 1/3 of the borrower’s household gross income. Otherwise, a lender does not offer a funding (mortgage loan). Running costs are defined as interest expenses for mortgage and utility charges (electricity, water, heating), insurance, maintenance and repair and any direct repayment (amortisation) of the loan.

80% can be financed
The external financing (80%) with mortgage loans works, where the buyer as collateral allows mortgage on the acquired property through a mortgage deed (“Grundpfandverschreibung”). The 80% is funded with 1st mortgage (65%) and a 2nd mortgage (15%). The 2nd mortgage is normally amortised directly or indirectly over the years so that the loan is repaid at the latest when reaching retirement age.

Loan Types
There are in Switzerland many different loan types. Most common is the so-called “Festhypothek” in which the interest rate as well as the loan term are fixed. This type of loan is a good idea if you are working with a budget (incomes/expenditures) and want a constant rate. Another type of loan is the “variable Hypothek” without a fixed term and a variable interest rate. The interest rate on this loan is following the developments in the capital market. This loan type is interesting in a market with declining or stable interest rates.

The providers of mortgage loans in Switzerland are banks and life insurance companies and can be done with loan terms up to 25 years. After the due date of the term it is normal to renew one’s loans.

Who offers the best financing in Switzerland?
Many buyers choose to use one’s own housing bank because it is easy and both parts know each other. Banks often suggest dividing the mortgage loans in different portions on the grounds of reducing an interest rate risk at renewal. It could, for example, be loans with 3, 5, 10 years of term. The problem with this structure is that it is impossible for a borrower to switch to a better deal along the way. No new lender wants a partial engagement. The new borrower will be placed last in the priority row and with the greatest risk; nobody is interested in this. An alternative is to then wait until all loan runs out and to hope that the interest rates are still attractive. If you choose mortgage from a bank, it is recommended to avoid these commitments with different term loans.

At the life insurance companies there is an increasing attention to the ongoing financing, especially when you get older (on a pension scheme), unemployed or perhaps unfit for work. It is therefore important to integrate the entire pension scheme and the future income security for the benefit of the borrower and its family.

Life insurance companies are cheapest as long term loan providers
Price wise, banks are usually the cheapest regarding loans up to 6-7 year terms, henceforth the life insurance companies win. Recently, we have seen an extremely low interest rate in Switzerland, hence the interest in long-term loans up to 15 years has increased tremendously at the life insurance companies. The borrower wants to “lock” his interest expenses in the next several years as people fear for the rise of interest rates. The difference between the largest banks and insurance companies are currently 0.5-0.6%. A loan of CHF 1 million means a saving of CHF 5-6,000 each year, that is, when the life insurance companies are cheapest.

Indirect repayment is preferable
Remember that in Switzerland you pay extra tax if you own real estate (rental value of owned housing). The extra tax in Switzerland, called “Eigenmietwert”, is calculated as a percentage of the property’s value and will be added to the taxable income. The tax may be reduced if you pay interest. It is thus not ideal to completely eradicate one’s loans. If you want a tax optimised solution when buying real estate, it is recommended to combine a mortgage loan” with a Swiss Capital Pension product as an amortisation tool. It provides ongoing tax benefits and a higher disposable fortune.

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