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 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. To obtain a mortgage, they must meet certain requirements: The loan-to-value ratio of the mortgage on the house or apartment may not exceed 80%. The buyer must therefore contribute at least 20% 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% 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%. For this reason, a distinction is made in theory between the first mortgage with a loan-to-value ratio of up to 67% and the second mortgage with a loan-to-value ratio between 67% and 80%. The exact percentages may vary slightly depending on the bank and the product.
By way of example, if the value of a property is CHF 1 million, the equity capital must be at least CHF 200,000. In this case, the first mortgage covers an amount of up to CHF 670,000 while the second mortgage covers the remaining up to CHF 130,000.
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 loan necessarily has to be concluded in two tranches in practice. Instead, a mortgage with a loan-to-value ratio of 80% can now be easily combined in a single product, for instance a 10-year Fix mortgage.
Dividing a mortgage into tranches: The benefits
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 loan expires during a high interest rate period, the mortgage 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
There are also disadvantages to a borrower combining two or more mortgages: If the various tranches do not expire at the same time, the borrower will no longer be able to change banks whenever they want to. 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.
This is because banks only grant second mortgages in combination with first mortgages. However, it is usually sufficient if the borrower 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 borrower during a sometimes multi-year transition period.
The right mortgage is personal
Whether a mortgage is concluded in tranches and which products are best suited depends on the personal situation, needs, and risk appetite of the borrower. Structuring would make sense if, for example, diversifying risks through different terms is important to them, or they want to pay off a certain amount of their mortgage at a certain point in time.
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 mortgage or an adjustable-rate mortgage.
Good advice is essential when applying for a mortgage
The aim of good mortgage advice is to understand the personal situation, financial opportunities, and needs of the mortgage borrower and to tailor the financing solution accordingly. 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.