The 7 Golden Financing Rules

Build Equity or Have the Luck of an Inheritance

“When I was young, I thought that money was the most important thing in life; now that I am old, I know it is.”
Oscar Wilde

In recent years, property prices in Switzerland have skyrocketed due to record-low interest rates. Many people find it nearly impossible to achieve the dream of owning their own apartment or detached house through their own efforts – either the required equity is lacking, or the income is insufficient to support a mortgage. Even though interest rates have been rising since 2022, the Swiss real estate market remains robust, and property prices continue to stay high.

With a rental rate of 64%, Switzerland is the “land of tenants,” and this is unlikely to change in the foreseeable future. Those who do not have the fortune of inheriting property within the family or cannot rely on financial support from family members must find other ways. So how can one still achieve the dream of owning a home?

There are essentially two key factors: income (and thus affordability) and equity (which affects loan-to-value ratios). In most cases, it is challenging to significantly increase family income within a reasonable time frame. While there are opportunities for further education, it is often easier for young couples or families to increase their equity. This approach reduces the interest burden, making the property more affordable.

But how can you increase your equity, and what should you consider? Here are some options:

• Gifts: A generous gesture from family members can help increase the equity portion.
• Early Inheritance: With this option, part of the inheritance can be used for property financing during the benefactor’s lifetime.
• Interest-Free Loans: An interest-free loan from relatives or friends can also ease the financing burden.
• Pension Fund Assets: Under certain circumstances, pension fund assets can be used to invest in real estate. It is essential to understand the relevant conditions and tax implications.

Debt is a Good Thing

“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
J.P. Getty

Financial institutions finance up to 80% of the purchase price of a property, a concept known as loan-to-value (LTV). This is divided into the first mortgage (65% of the purchase price) and the second mortgage (remaining loan amount up to a maximum of 80%). Typically, the second mortgage must be repaid within 15 years, or at the latest, by retirement age. This repayment process is called amortization.

In other words, as a buyer, you must provide at least 20% equity. For a purchase price of CHF 1 million, you need at least CHF 200,000 in equity. This equity can come from savings, securities, or retirement savings. Important: At least 10% must be “hard equity,” meaning it cannot come from your pension fund.

If the financial institution values the property lower than the purchase price during its internal assessment, the bank adheres to the lower of cost or market principle. This means that potential buyers must cover the difference themselves.

For retirement savings (pillar 3a, pension fund), there are two options: early withdrawal or pledging. Both options have advantages and disadvantages, and the tax and insurance implications should always be discussed with an expert.

Speaking of taxes: acquiring property and taking out a mortgage have tax implications. There are one-time taxes, such as those incurred when withdrawing funds from a pension fund or, depending on the canton, during the property transfer (Handänderung). Additionally, there are recurring taxes like imputed rental value and wealth tax. On the other hand, mortgage interest and value-maintaining investments can be deducted.

Overall, it can be concluded that debt related to real estate is not inherently bad—in fact, with a well-chosen mortgage strategy, one is often better off financially in the long term.

The 33% Rule

“A bank is a place that will lend you money if you can prove that you don’t need it.”
Bob Hope

Back to basics: Another important financing rule states that ongoing housing costs (interest, amortization, and additional costs) should not exceed one-third of the buyer’s gross income. This so-called affordability calculation is a long-term view, meaning that banks use not the current interest rates but hypothetical interest rates, which are currently around 5% based on historical averages.

Here’s an example calculation: If the purchase price of a property is CHF 1 million and the total mortgage burden is CHF 800,000 (first mortgage: CHF 650,000 and second mortgage: CHF 150,000), the annual hypothetical housing costs are as follows:

• Mortgage Interest: CHF 40,000 (5% of CHF 800,000)
• Additional Costs and Maintenance: CHF 10,000 (typically 1% of the purchase price)
• Amortization: CHF 10,000 (the second mortgage must be amortized within 15 years)

This results in total annual housing costs of CHF 60,000. These costs should not exceed one-third of the household’s gross income, meaning the household should earn at least CHF 180,000 per year.

Reality Check: Considering property prices, especially in metropolitan areas like Zurich, it becomes clear that it is difficult for a family of four to find suitable housing for under CHF 1 million. This explains why many people, despite dreaming of owning their own home, continue to rent.

Avoiding Naivety

“Why is there so much month left at the end of the money?”
John Barrymore

One thing is certain: acquiring homeownership can radically change your life. Beyond the sheer joy of owning a home, a wealth of new responsibilities and financial considerations arise for new owners. It is precisely during this transition from renting to owning that the danger of naivety lurks.

While rent payments are often straightforward and easy to calculate, the costs of homeownership can vary depending on the mortgage model chosen. At the center of this decision is the choice between a fixed-rate mortgage, a LIBOR mortgage (money market mortgage), or a mortgage mix with multiple tranches and different maturities. Each model has its own advantages and disadvantages. A fixed-rate mortgage offers planning security with a constant interest rate over the term. You know exactly what payments to expect in the coming years, regardless of any market fluctuations. This can be particularly attractive for families with a stable income.

A LIBOR mortgage, on the other hand, is more flexible. It adjusts to market conditions and can be very advantageous during times of low interest rates. However, it also comes with higher risk. If interest rates rise, so do the monthly payments. For the adventurous, this might sound appealing, but it is essential to be aware of this potential financial burden.

The conclusion? Do not enter homeownership naively. Thoroughly inform yourself about the various financing options and seek advice from experts to find the model that best fits your life situation. Understanding the implications of each mortgage type and how it aligns with your financial goals and risk tolerance is crucial. Taking these steps will help ensure that your transition to homeownership is smooth and sustainable, avoiding unexpected financial strains.

Letting Competition Play Out

“Competition is the fun of spoiling others’ fun.”
Manfred Hinrich

When it comes to mortgages, healthy competition proves to be a decisive advantage. By obtaining multiple quotes from different lenders (banks, insurance companies, and pension funds), a more advantageous position—both financially and strategically—can be achieved.

The most obvious benefit? Lower interest rates or margins. No two lenders offer identical terms. Conducting a comprehensive comparison of different offers not only provides a thorough overview of the market but also puts into perspective common and often less competitive offers from traditional banks. Even a marginally lower interest rate on mortgages can lead to significant savings over the years.

Let’s consider a mortgage of CHF 800,000 over a period of 10 years. Comparing an interest rate of 1.8% to 2.0% clearly illustrates how even small differences can accumulate over time.

At an interest rate of 1.8%:

• Annual interest cost = CHF 800,000 x 1.8% = CHF 14,400
• Total cost over 10 years = CHF 14,400 x 10 = CHF 144,000

At an interest rate of 2.0%:

• Annual interest cost = CHF 800,000 x 2.0% = CHF 16,000
• Total cost over 10 years = CHF 16,000 x 10 = CHF 160,000

A difference in interest of just 0.2% results in additional costs of CHF 16,000 over the 10-year period for this mortgage. This example underscores the importance of thoroughly researching interest rates and seeking the best conditions available.

However, it’s not only the interest rates that matter. Fees and other costs can vary from institution to institution. A thorough comparison of different offers helps identify the most cost-effective option.

Market comparison also offers strategic advantages in negotiations. Presenting multiple competitive offers to a lender can create incentives for improvements in the offer (think margin pressure). Ultimately, the effort to compare interest rates pays off. The Swiss Property Owners Association has found that choosing the right financing partner and negotiating the right interest rate can mean the difference between worry-free and worrisome homeownership.

Thinking Ahead

“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.”
Robert Frost

In the fast-paced world of finance, it’s easy to get caught up in the here and now. However, when it comes to purchasing a home, thinking long-term is essential. “Thinking ahead” thus becomes not just a maxim but an indispensable requirement for those looking to fulfill the dream of homeownership.

Long-term thinking: Owning a home is typically a lifetime investment. It involves not only the purchase price but also long-term commitments such as maintenance costs, potential interest rate increases, and the development of the neighborhood. Those who plan wisely today and consider all eventualities can live worry-free in their own home tomorrow.

Regular review of financing strategy: The financing strategy chosen initially may not be optimal in a few years’ time. Interest rates, the financial market, personal financial changes, or macroeconomic developments can all have an impact. Therefore, it’s advisable to regularly review your financing decisions, discuss them with professionals, and make adjustments as necessary.

Keep an eye on the real estate and interest rate markets: Even after purchasing a home, it’s important not to lose sight of the real estate and interest rate markets. How are property prices developing in the neighborhood? Are there changes in interest rates? Keeping a continuous watch on these factors can help stay financially ahead.

Strategic, long-term thinking, coupled with a willingness to adapt to changing circumstances, is the key to successfully and worry-free realizing the dream of homeownership. By embracing the motto “Thinking ahead,” one lays the foundation for contented living in their own property.

Expect the Unexpected

“First, it comes differently, and second, than you think.”
J. Paul Getty

Smart planning for homeownership in Switzerland is based on a crucial realization: Things often unfold differently than anticipated. It’s important to be aware of these uncertainties and to be prepared to live comfortably in your own home in any situation.

The cornerstone of successful homeownership is sustainable financing. It’s not only about being able to afford monthly payments now but also in the future—under various circumstances. Forward-looking financing takes into account potential interest rate increases or income fluctuations. A realistic assessment of your financial capabilities and limits establishes the foundation for long-term security.

It’s also crucial to set aside reserves for unforeseen expenses or emergencies. Whether it’s repairs, renovations, unexpected ancillary costs, or major purchases—having a well-funded emergency fund allows homeowners to manage such challenges calmly and maintain peace in their own home.

Often, it’s not major catastrophes but small surprises that pose challenges for homeowners: the roof needs repairs, the heating system fails, or life circumstances suddenly change. Therefore, it’s essential to remain realistic during both the planning and the living phases of homeownership. A sober assessment of realities helps avoid disappointments and equips homeowners to handle any situation confidently.