In the past, banks made their main business with investment projects of the companies, for example by financing the purchase of production machines. Since the 1970s, however, the mortgage business has grown enormously and has become an important and necessary means for financial institutions and citizens. Even in rich Switzerland, the purchase of real estate, a home, whether a house or a freehold or vacation apartment, is hardly possible for anyone without external financing. This external financing is provided in the form of a mortgage by mortgage providers such as banks, but now also by insurance companies and pension funds.
What is a mortgage?
For the money provided or the loan for the purchase of real estate, the mortgage provider requires a security from the buyer. This is realized in the form of a pledge on the property in question. A mortgage is therefore nothing more than a security for the bank. In this way the bank receives a security to get its money back. If the buyer defaults on his interest and amortization payments, the bank can make use of this security (lien).
How does a mortgage work?
Once you have found your dream property, get advice from a professional. The main thing here is to work out a financial proposal and determine the key data of the financing conditions. These conditions will become part of the loan agreement which will then be signed between you and the mortgage provider. With the signing, you are then the owner of your dream property. By means of a mortgage, the bank acquires the security for the property. The mortgage provider then transfers the mortgage amount to the seller according to the purchase contract. From this point on, you pay mortgage interest to your mortgage provider and reduce your mortgage through amortization.
You must finance at least 20 percent of the property value specified in the financing conditions with your own funds. At least half of this must consist of liquid savings, while the other half can be drawn, for example, from the pension fund (in case of self-use). The remaining 80 percent is covered by the mortgage. Please note: there may be differences between the value of the property and the purchase price according to the purchase contract. In this case the real estate value determined or recognized by the mortgage provider always counts.
The requirements regarding own funds vary depending on the use of the property. If the property is occupied by the owner, capital from the pension fund (2nd and 3rd pillar) can also be pledged in addition to the required 20% of the equity capital.
For vacation homes, more equity capital is required, between 30 and 40 percent of the value of the property. However, the capital from the pension fund cannot be used for this type of property.
For real estate that is to be rented, similar regulations apply as for own use. For commercially used real estate, increased equity rules apply, since the mortgage provider only finances up to 50 percent of the value of the property.
The loan-to-value ratio shows nothing else than the capital situation: what percentage of the purchase price was paid by the mortgage provider and how much by you as the buyer. As already mentioned above, in the case of properties that are occupied by yourself, the mortgage provider pays up to 80 percent of the property value. Example: The real estate value is CHF 500,000. For the sake of simplicity, we equate the real estate value with the purchase price in this example. Your own capital contribution is CHF 100,000, while the remaining CHF 400,000 is transferred by the bank to the seller. As a security, the bank will now lend your real estate with a corresponding mortgage in the amount of CHF 400’000.
The most common mortgage models are fixed and variable mortgages.
With fixed mortgages, the interest rate is fixed for a certain term, for example for five or ten years. This model is suitable for risk-averse borrowers or in times when interest rates are expected to rise. Disadvantages with fixed mortgages can arise above all when the market interest rate falls. Then you are stuck with expensive financing. Even in the case of premature dissolution, high costs, often in the five-digit range, can arise.
Variable mortgages are not necessarily tied to specific terms. They can be dissolved unilaterally or by mutual agreement and usually without disadvantages. The model allows for great flexibility, but also involves major risks in the event of market instability.
With the purchase of the property not everything locked. The so-called annual expenses apply to take into account. They consist of interest and amortization payments, and maintenance and ancillary costs together and may not exceed 1/3 of annual income.
The affordability is calculated by dividing the annual expenses by the household income. The result shows the amount of the burden on the annual income. This value must not be higher than 33 percent.
Example: Total annual expenditure of the property CHF 30’000 / Annual household income CHF 150’000 results in a wearability value of the property of 20 percent. Conclusion: the annual income is burdened by 20 percent by the annual expenses, thus the long-term affordability of the property is given.