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 home is subject to different conditions than the primary residence.
Financing a vacation home is subject to stricter requirements
Imagine this: A cozy chalet with a beautiful Swiss mountain backdrop. Or how about a Mediterranean villa overlooking the deep, blue Lake Lugano? Can you picture it? Excellent! Now imagine that this house belongs to you. You can use it for last-minute weekend trips and hard-earned vacations, and relax in your own private domicile.
Many Swiss people have the same dream. 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 property in Switzerland
Compared with your primary residence, Swiss banks provide less financing for vacation property. While mortgages can be for up to 80 percent of a primary residence, this figure is just 50 to 70 percent for vacation condos and homes. In other words, the share of equity is much higher – i.e., 30 to 50 percent. 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 risks. When money is tight, the 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 the family income.
No financing a vacation home using pension capital
There are other requirements that impact the financing of a vacation home. 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 the pension fund or 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 funds to buy a vacation property. After all, a vacation home may seem luxurious today, but you could face financial bottlenecks down the road. However, there is a way to increase your hard equity with pension capital: If you already own your home, you can increase the mortgage on this property to up to 80 percent. 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 stricter rules than for your primary residence. For instance, the remaining mortgage debt must be below 50 percent within 15 years or by the time you reach retirement age. With 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 may also be up to one percent higher than for the 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 an interest rate that is not much higher than that of your primary residence.
Despite the financial obstacles, it is possible to afford a vacation home. Once you are lounging on the terrace of your vacation home in the near future, you'll surely be thinking: This was well worth it!