Promotion of home ownership: Expert interview on real estate financing

The risks of using retirement assets to finance home ownership: Advice from the experts. 

The promotion of home ownership scheme allows buyers to use retirement assets to purchase their first home. However, an advance withdrawal or pledging of retirement assets means taking a look far into the future. Financial advisor Alexandra Caliman and financing expert Marco Schmutz explain the risks you need to factor in. 

Ms. Caliman, do you advise your clients to use their retirement assets to finance their first home?

Alexandra Caliman*: Considering the high price of real estate and disposable cash, most people have no choice. They need to withdraw retirement assets in order to fulfill the dream of home ownership. However, many people do not consider the consequences that such a withdrawal could have on their pension provision. As experts, our most important task is to inform our clients about these risks and advise them to minimize withdrawals or guide them toward other solutions. For example, one alternative may be pledging their retirement assets.   

What risks are you referring to?

Alexandra Caliman: If funds are withdrawn from the second or third pillars to purchase a home those funds are no longer available in retirement. In some cases, death and disability benefits can also be reduced. In addition, taxes may be levied on the assets withdrawn.

When pledging assets, it is possible to increase the mortgage amount from 80% to 90% of the real estate's purchase price. This, in turn, requires higher savings if the client wishes to repay the mortgage at a later time. Clients should also note that increasing their mortgage loan results in higher interest expenses and further costs for setting up the mortgage note.

Pledging offers more financial options to offset any pension gaps. 

Marco Schmutz, Financing Expert at the Mortgage Center in Nyon

How exactly does an advance withdrawal affect how much tax is paid?

Alexandra Caliman: The higher the amount of assets withdrawn, the higher the tax rate. Retirement capital is taxed at a preferential rate and separately from other income. This preferential tax rate varies depending on the canton and the family situation. In Geneva, for instance, a married person with no children is not liable to pay any tax on a withdrawal of CHF 29,000. In Lausanne, by contrast, this person would have to pay approximately CHF 1,000 in tax on the same withdrawal amount. 

Mr. Schmutz, which do you recommend more often to your clients: pledging or making an advance withdrawal?

Marco Schmutz*: Pledging funds from the second pillar makes sense because clients still have the option to purchase pension benefits. These purchases can be fully deducted from taxable income. In the event of an advance withdrawal, such purchases are only possible when the client has repaid the withdrawal. Pledging therefore offers more financial options to offset any pension gaps.

However, it is important to be aware of the risks of pledging highlighted by Alexandra. Comparing the advantages of an advance withdrawal and pledging is as important as it is complex. Pension fund regulations vary, equity capital requirements can change and then there are SNB interventions, market prices, mortgage interest rates, etc. Becoming a homeowner will not be a simple matter in the future either.

Let us come back to the risks. What happens in the event of divorce if pension capital was used to purchase a home?

Alexandra Caliman: Well, in the event of a divorce that results in the sale of the joint property, the amount withdrawn from the second pillar must generally be repaid. If one of the two parties assumes ownership of the property, they have to compensate their ex-spouse for the amount of their share withdrawn from their pension fund. If the retirement savings are split between the two parties as part of the divorce, any advance withdrawals are also taken into account during the division of assets.

And if the insured person dies, what happens to the money invested in the first home?

Alexandra Caliman: Depending on the pension fund system, the pension and further benefits for surviving dependants, such as the lump sum payable at death, could be reduced.

Marco Schmutz: This applies to widow's/widower's pensions and orphan's pensions. An advance withdrawal can result in both being reduced. However, this differs from pension fund to pension fund.

Alexandra Caliman: And if the heirs cannot benefit from death and disability benefits, as in the case of children who are no longer entitled to an orphan's pension, for instance, they need to repay the withdrawn capital.  

The surviving dependant is not entitled to the deceased's ownership interest in the property if their cohabiting partner dies. 

Alexandra Caliman, Financial Planner Region Geneva 

Do the risks of withdrawing retirement assets to finance home ownership differ in the case of marriage and cohabitation?

Alexandra Caliman: Cohabiting couples should note that the partner will not necessarily receive a widower's or widow's pension in contrast to a married person with a child. The requirements that need to be fulfilled for entitlement to this benefit depend on the regulations of the relevant pension fund. If, by contrast, an owner-occupied home is purchased in joint ownership by a married or cohabiting couple, i.e. each partner owns a specific share, the amount of assets that each may withdraw from their second pillar is the same as their share of ownership in the property. Furthermore, this is only permitted for the first home.

Finally, the surviving dependant has no rights with respect to succession and consequently has no claim to the deceased's share of ownership if their cohabiting partner dies. It is passed on to the deceased's legal heirs under Swiss law. The heirs can waive their interest in the property if the surviving dependant wishes to repurchase it. To prevent this situation from happening in the first place, a last will can be set up in advance governing how the deceased's estate and thus their share of ownership in the property are divided up, taking into account the legally prescribed compulsory portions.

Marco Schmutz: As you can see, with two owners, questions such as the provision of equity capital and the affordability of financing become even more complex. 

How can clients protect themselves against these risks?

Marco Schmutz: Taking out insurance to cover risks is essential, for instance in Pillar 3b. It is best to discuss the details with an expert as, generally speaking, not every gap in pension provision can be offset via the third pillar.  

What support can you offer your clients here?

Marco Schmutz: The amount that can be withdrawn from the second pillar can be found in the pension fund statement. This information allows us to provide a simulation of various scenarios, giving clients an idea of how an advance withdrawal or pledge may affect their pension provision.  

Are there cases in which you advise clients against an advance withdrawal of their pension capital for residential property entirely?

Alexandra Caliman: I advise against it if the client is already near retirement, as this means there is a reduced timeframe for repaying the amount. This also generally applies to single persons who no longer have the option to optimize tax via purchases. 

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