The dream of having one’s own home in Switzerland usually begins with the search for real estate. The economic foundation must firstly be analysed to determine how expensive a property you can buy. The purchase price is determined on the usual criteria such as: location, infrastructure, size, design as well as the property’s condition.
In order to get the most out of your property, the financial burden should be acceptable. Thus, it is important to make a realistic budget and find a reasonable financing. Below, we give a few tips on how this can be done:
The 80/20 rule
In Switzerland, usually 20% of the purchase price will be paid in cash by the buyer. The remainder, i.e. 80%, can be financed through outside funds. It can be a mortgage loan, which is similar to mortgage loans. The loan is mostly divided into a first and second mortgage loan, depending on the priorities and wishes of the buyer.
The 1/3 rule
The running costs for a property in Switzerland should not exceed 1/3 of your gross annual income. The costs are defined as interest expenses on mortgage provided for the mortgage loans (1st and 2nd), operating costs, called “Nebenkosten”, and possible amortisation of the second mortgage loan.
The down payment
Should you be in the situation that you do not have enough equity to pay 20% in expenditures upon signing the contract, there are still opportunities. In Switzerland it is possible to pledge or make a pre-payment from your pension fund (2nd pillar) or the third pillar, which is the Swiss pension capital.
Mortgages in real estate in Switzerland
The financing through the mortgage works as a loan where the buyer accepts a collateral on the acquired property. The first mortgage loan is usually offered up to 65% of the property value/purchase price. From a tax perspective, it is ideal not to repay this loan (see indirect amortisation below). The second mortgage loan is offered at 65-80%, i.e. 15% of property value/purchase price. The second mortgage is normally amortised over the years so that the loan is repaid after 15 years or at the latest when reaching retirement age.
The “Hypothek” – mortgage loans offered in Switzerland:
Festhypothek (fixed rate)
Liborhypotek (variable rate)
Variabel Hypothek (variable rate)
Fixed rate means that the interest rate on the loan will be locked by the loan agreement. This has the advantage that you can budget future expenses. Fixed-rate loans have a term of 3-15 years.
Variable rate means that the interest rate on the loan may change in both upward as downward depending on the interest rate and capital market situation. This provides the advantage that if you expect a general decline in interest rates, the future costs can be reduced.
Tax Tips – indirect amortisation
In Switzerland you pay tax on the rental value of your main property, which is the so-called “Eigenmietwert”. This extra tax is calculated on the property value and will be added to the taxable income. The rental value of the property can be fiscally reduced if you pay interest or maintenance costs on the property. Thus, it is optimal not to repay the first mortgage, but alternatively use a tax-favoured saving (Swiss pension capital – 3A) as amortisations tool. Upon retirement one has thus still a loan (mortgage 1), but also a substantial pension saving which provides ongoing tax benefits and a higher disposable fortune.
My-switzerland.info can help you with this indirect amortisation (the mortgage and pillar 3A). Please don’t hesitate to contact us.