Financing your own home: The most important basic principles.
Looking to buy your own house or apartment? Only a fraction of buyers can afford to fully finance a home of their own themselves. In order to fulfill the dream of owning your own place, however, you can borrow money from a bank – in the form of a mortgage. We explain the most important basic principles on the subject of financing homeownership.
Mortgage
A mortgage is a loan secured with real estate. In other words, when a mortgage is concluded, the mortgage holder borrows money from the bank at a specific interest rate to buy the property. The bank then receives a mortgage note for the property as collateral.
Market value
The basis for the calculation of a mortgage is the "market value" of the property. The market value refers to an estimated price that would be obtained by properties of the same or similar size, location, and quality in the area in question under normal market conditions.
The purchase price and market value are normally identical. Due to high demand in the Swiss real estate market, however, there may be times when the purchase price for the property exceeds the market value. The difference between the two values cannot be covered with a mortgage and must be paid by buyers themselves instead.
First and second mortgages
The amount of the mortgage is based on the mortgage holder's financing needs and may be up to a maximum of 80% of the market value. Due to various repayment rules (see Repayment section), a theoretical distinction is made between the first mortgage, which covers a loan-to-value ratio of up to 67%, and the second mortgage, which covers a loan-to-value ratio of between 67% and 80%. The exact percentages may vary slightly depending on the bank and the product.
This theoretical distinction between the two types of mortgage does not, however, mean that a loan necessarily has to be concluded in two tranches in practice. As such, the mortgage can be subdivided independently of the first and second mortgages.
Hard and soft equity capital
A maximum of 80% of a property's value may be financed by borrowing. Conversely, this means that buyers must be able to pay at least 20% of the real estate value themselves in the form of equity capital.
Of this 20% equity capital, at least 10% must be "hard equity capital." This encompasses account balances and savings, securities, Pillar 3a pension capital, surrender values for insurance policies, gifts, and inheritances. The remaining equity capital can be "soft equity capital," i.e. withdrawals or pledges of pension fund assets.
Equity capital in a nutshell
Watch this video to find out what can be used as equity capital.
Source: Credit Suisse
Promotion of homeownership
In many cases, property is purchased using advance withdrawals and pledges from retirement provisions, i.e. the second pillar and Pillar 3a. These options are classified as promotion of homeownership and are subject to detailed rules that you need to be aware of.
For example, you can withdraw all your assets from your pension fund until you reach the age of 50; after that, the amount you can withdraw is capped. In the case of Pillar 3a, you can withdraw all your assets regardless of age. Withdrawals from both pillars are only possible every five years. Pledging assets is also an option. Read our detailed articles to find out when this makes sense and what else you need to know.
The possibility of withdrawing pension fund assets under the promotion of homeownership scheme is a helpful option for increasing your equity capital and fulfilling the dream of buying your own home. However, advance withdrawals from the second pillar and Pillar 3a can also have a downside. This is because withdrawing the amount means it will be missing from your retirement provision later. Death and disability benefits may also be reduced in some cases. For this reason, it is crucial to make plans with the future in mind. Credit Suisse financial experts explain what you need to take note of in this context.
Long-term affordability
In order to take out a mortgage for their dream home, buyers must have an adequate level of regular income – in addition to the 20% equity capital – to ensure the financial affordability of the property. In other words, the imputed housing costs (mortgage interest, repayment, maintenance and ancillary costs) must not amount to more than one-third of gross income.
Misunderstandings are common, since buyers often budget based on the current very low level of mortgage interest rates. To be on the safe side, however, most banks typically assume a long-term average interest rate of 5%, the "imputed interest rate." This is done in the interest of ensuring that the mortgage remains affordable for homeowners over the long term even in the event of rising interest rates.
Equity capital and the affordability of mortgages – explained simply and succinctly
Anyone wishing to buy their own home is faced with the issue of how much equity capital must be or should be provided and the extent to which affordability is a factor in this decision. This video explains the important things to note when pledging pension capital and how this differs from advance withdrawal.
Source: Credit Suisse
Financing options
Mortgages are not "one size fits all" – in fact, there are a number of different mortgage models with differing conditions. Some offer an interest rate which is fixed over a period of multiple years, while others adapt to current interest rate levels on an ongoing basis. The choice comes down to whether you would prefer to play it safe or are willing to take fluctuations into account – and potentially benefit from lower interest rates.
When taking out a mortgage, it is recommended that you discuss your individual financial situation and options with a financing expert. This will help you find the mortgage that suits your needs best.
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Fix mortgage
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The Credit Suisse Fix mortgage is what is known as a fixed-rate mortgage. This allows you to plan and budget securely. It has a fixed term of 2–15 years at a fixed amount and a fixed mortgage interest rate.
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Forward fix mortgage
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The Forward fix mortgage also has a term of 2–15 years. With this option, the mortgage interest rate can be agreed upon up to three years before the disbursement of a new mortgage or the renewal of an existing one.
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SARON mortgage
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In this case, the interest rate consists of a base rate linked to the SARON rate and an individual surcharge. It is calculated at the end of a billing period of one to three months. The term can be one, two, or three years.
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SARON rollover mortgage
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The SARON rollover mortgage works in a similar way, but the interest rate is communicated and guaranteed at the beginning of each one-month tranche. The term can be one or two years.
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Construction loan
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The Construction loan is suitable for construction projects. The loan amount is flexible and provides leeway for paying outstanding invoices during the construction phase. When everything is finished, the loan is converted into a mortgage.
Repayment
The costs for repaying the mortgage to the bank are a key element of the affordability calculation. Mortgages with a loan-to-value ratio of up to 67% are considered first mortgages and do not necessarily have to be repaid – unless the financial situation requires this. As such, it is important for mortgage holders to assess which factors can make repayment advisable or inadvisable: For example, each repayment installment serves to reduce the interest rate and the debt-to-equity ratio. At the same time, however, debt repayment may not be the best option in consideration of tax factors and missed opportunities for returns.
A repayment obligation does apply, however, for amounts above the 67% threshold, i.e. for the difference between that and the maximum possible loan of 80%. Referred to as the second mortgage, this amount must be repaid within 15 years or, in the case of mortgage holders over the age of 50, by the time they retire. There are two options to do this: direct and indirect repayment. With direct repayment, the mortgage is repaid to the bank in regular installments. In the case of indirect repayment, the payment is first transferred to a Pillar 3a pension account or safekeeping account. Determining which of these options is right for you depends on your financial possibilities and tax aspects.
Read the following detailed articles to compare the pros and cons of voluntary repayment and of direct and indirect repayment.
A short and simple guide to mortgage repayment
Your advisor for financing homeownership
When financing the property of your dreams, it is best to get advice from a financing expert in your region. Credit Suisse is here to help, and will review your financial options together with you. This will ensure that you are optimally prepared to buy property.
