Financing a vacation condo or home: What you need to know

Purchasing a vacation home: What you need to know

Many Swiss people long for a vacation home in the mountains or in Ticino. Financing a vacation condo or vacation home is subject to different conditions than those for a primary residence.

Financing a vacation home is subject to stricter requirements

Just imagine it: A cozy chalet in the heart of the spectacular Swiss mountains. Or how about a Mediterranean villa overlooking the rich blue waters of Lake Lugano? Can you picture it? Looks wonderful. Now imagine that this house belongs to you. That you can use it for last-minute weekend trips and hard-earned vacations; your home away from home.

This is a dream that many Swiss people cherish. To make it a reality, you need good planning and a solid financial base, since buying a vacation home or condo is subject to stricter financing rules than your primary residence.

Lower mortgages for vacation condos in Switzerland

Swiss banks provide less financing for vacation properties compared to primary residences. While it's possible to obtain a mortgage for up to 80% of the cost of a primary residence, this figure is just 50%–70% for vacation condos and vacation homes. In other words, the amount of equity required is much higher, i.e. 30%–50%. You must cover up to half of the purchase price using your own funds.

These stricter lending requirements are due to the bank's higher default risk. When money is tight, a vacation home is the first thing to be sold, often for less than the purchase price. Banks also look at the total mortgage debt. If you already have a mortgage on residential property, the debt from the vacation property is added to your current debt. The total cost of all mortgages cannot exceed one-third of a family's income.

Tax considerations when buying a vacation home

Vacation homes are subject to tax just like a primary residence. That means the imputed rental value must also be declared as income in your tax return. The same applies to real estate gains tax if you want to sell a vacation property. Caution should be exercised here: If you own the property only for a short time, a real estate gains tax surcharge will be applied.

Volatile market for second homes

The market for vacation condos experiences greater price fluctuations compared to the residential property market. This makes it important to be well informed about this market. Vacation condos are currently in high demand – in some regions the supply has practically dried up.

By contrast, interest in residential properties in the mountain regions has fallen slightly. That said, demand is still above the long-term average seen in recent years. Wealthy households seeking apartments in desirable locations are among those driving demand – because this demographic has a lower degree of interest-rate sensitivity compared to low-income households.

If you intend to buy a house, you should find out about the market fluctuations and take into account how long you intend to keep the vacation home. Find out more about the real estate market in Switzerland.

Vacation homes cannot be financed using pension capital

There are other requirements that impact the financing of a vacation property. For instance, when considering a purchase, bear in mind that the law prohibits using pension capital to finance a vacation residence in Switzerland. Accrued assets from a pension fund or from private pension provision (Pillar 3a) therefore do not qualify as equity. You can use only "hard equity" such as money from savings accounts or securities safekeeping accounts.

The government has implemented this rule to prevent buyers from jeopardizing their pension capital to buy a vacation home. After all, a vacation home may seem luxurious today, but you could face financial bottlenecks down the road. There is one way to boost your hard equity using pension capital, though: If you already own your own home, you can increase the mortgage on that property to up to 80%. This lets you free up funds to finance your second home.

Different repayment rules and higher interest on vacation homes

When it comes to paying off a vacation home, there are also stricter rules than for a primary residence. For instance, the remaining mortgage debt must be reduced to under 50% within 15 years or by the time you reach retirement age. In the case of a permanent residence, only the second mortgage must be repaid in this period. The debt must be reduced to two-thirds.

The mortgage interest rate for vacation homes can also be quite a bit higher than the interest rate for a primary residence. Remember to factor in these additional costs for your annual budget. However, the mortgage industry is very competitive in Switzerland, so with a little skill you can negotiate a slightly lower interest rate that is not much higher than that of your primary residence.

Do you have any questions about financing a vacation condo or home?

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