Applying for a mortgage. How to combine your first and second mortgages.
If you want to combine the advantages of various financing models, you can divide your mortgage into tranches. However, whether a second mortgage really makes sense depends on your personal situation and your needs.
Applying for a mortgage: These are the requirements
Those who wish to buy a home can very rarely fully finance it with their own funds. Therefore, most buyers rely on a mortgage from a bank for financing. For this, they must meet certain specific requirements: The loan-to-value ratio on the house or the apartment may not exceed 80 percent. This means that the buyer must contribute at least 20 percent of the purchase price in the form of equity capital.
First and second mortgages depend on the loan-to-value ratio
Mortgages with a loan-to-value ratio of up to 67 percent do not necessarily have to be repaid, unless the financial situation requires this. There is, however, a repayment obligation for amounts beyond this, i.e. for the difference to the possible loan-to-value ratio of 80 percent. For this reason, a distinction is made in theory between the first mortgage with a loan-to-value ratio of up to 67 percent and the second mortgage with a loan-to-value ratio between 67 and 80 percent. The exact percentages may vary slightly depending on the bank and the product.
One example: If the value of a property is 1,000,000 francs, the equity capital must be at least 200,000 francs. In this case, the first mortgage covers an amount of up to 670,000 francs while the second mortgage covers the remaining 130,000 francs.
First and second mortgages do not necessarily have to be concluded in tranches
The theoretical distinction between the two types of mortgage does not mean that a credit necessarily has to be concluded in two tranches in practice. Instead, a mortgage with a loan-to-value ratio of 80 percent can now be easily combined in a single product, for instance a 10-year Fix mortgage.
Dividing the mortgage into tranches: These are the advantages
Dividing a mortgage into tranches definitely has advantages, because this means that a different product can be selected for each tranche. This enables you to combine the advantages of different mortgage models. For instance, the security of a Fix mortgage can be complemented by a SARON mortgage, with which you can benefit from interest rate fluctuations on the market.
If two mortgages have different terms, this has two additional advantages:
- If a credit expires during a high interest rate period, it has to be refinanced at unfavorable conditions. This risk can be diversified through several tranches.
- With a division into tranches, it is possible to react more flexibly to the respective current interest and personal situations. For instance, part of the mortgage can be flexibly repaid as soon as the necessary capital is available.
Dividing a mortgage into tranches also has disadvantages
If a debtor combines two or more mortgages, this also has disadvantages: If the various tranches do not expire at the same time, they lose the option of being able to switch banks at any time. If this financing flexibility is important to you, make sure that the terms of the two tranches are no more than two or three years apart.
The reason? Banks only grant second mortgages in combination with first mortgages. However, it is usually sufficient if the debtor undertakes to also transfer the first mortgage at a certain point. In this case, the financing institution will only handle the second mortgage of the debtor during a sometimes multi-year transition period.
The right mortgage is personal
Whether a mortgage should be concluded in tranches and which product or products are best suited depends on the personal situation, the needs, and the risk tolerance of the mortgage borrower: For instance, if they wish to pay off a certain amount of their mortgage at some point, structuring makes sense; it also does if diversifying risk through various terms is important to the borrower.
Additionally, the current interest level also impacts mortgage selection. With low interest, relying on long-term Fix mortgages is attractive. In contrast, if falling interest rates are to be expected, it may make sense to bridge the period until that happens with a SARON or an adjustable-rate mortgage.
Good advice is the most important element in applying for a mortgage
The goal of good mortgage advice is to understand the personal situation, financial possibilities, and the needs of the mortgage borrower and to adjust the financial solution to these factors. After all, there is no right or wrong, no good or bad products. Mutual trust is important for the advice to provide maximum added value.