Buying a house: here’s how the funding works

Buy or rent? Buy! Over recent years, the run on real estate has increased sharply. But owning a property depends essentially on long-term financial affordability. If you’d like to buy a house, you should carefully review your financial situation.

Buying a "place of your own" is still one of the most important life goals in Switzerland. With good reason, as mortgages and amortization are mostly cheaper in the long term compared to renting a house or apartment for decades. Home ownership also has tax benefits and creates a solid investment in uncertain times. Nonetheless, the growth in demand has driven up real estate prices. That's why potential buyers with a limited budget are often uncertain about whether home ownership in Switzerland is affordable for them at all. We’ll show you what you have to look out for. Our affordability checklist also gives you a practical starting point. 

How much of my own money do I need to buy a house?

Using the 20:80 rule, at least 20 percent of the property's value must be funded using your own equity. The remaining 80 percent of the purchase price may be funded using borrowed capital. At least these are the regulatory requirements – some banks and other mortgage providers have much stricter criteria for lending. Half of the equity must be "genuine" equity, such as savings, securities, inheritance advances, and gifts. The other half must be in the form of an advance withdrawal from the pension fund (Pillar 2).

Please note: In addition to the 20 percent equity, you should still have enough cash to cover the ancillary purchase costs (e.g. notary, land registry, debt certificate, property transfer tax, etc.). In Switzerland, this expenditure varies between 1 and 6 percent of the real estate price.

The more of your own capital you put towards a property, the lower the interest burden. But be careful never to put all of your liquid funds into home ownership: if you suddenly need money due to an unforeseen event, then it’s tied up and you’ll be faced with a liquidity bottleneck.

Tip: voluntary Pillar 3 is ideally suited for saving money to buy your own home. And with Pillar 3a, you’ll also optimize your tax every year.

How much income do you need to buy a house?

The housing costs for your property should not exceed one third of your gross income. This is the only way that buying a property is affordable for you over the long term. Apart from mortgage interest, there are also amortization and maintenance costs to be added to housing costs. Note: Regardless of the current interest rate level, a long-term average interest rate of 5 percent – known as imputed mortgage interest – is used to calculate the maximum mortgage loan in Switzerland.

Financing: what types of mortgage are there?

Mortgages in Switzerland are granted by banks, insurance companies and pension funds. The amount of money they'll lend you to buy a property depends on your income and assets. In the first instance, you should therefore check with your bank or insurance company to determine how high your loan can be. Our mortgage calculator helps you work out whether you can afford the home of your dreams. 

Secondly, find out which model is the right one for you, i.e. fixed, SARON or variable rate mortgage. 

• A fixed-rate mortgage makes planning easier because a fixed interest rate is set for a term of between two and 25 years. However, a fixed rate mortgage is quite inflexible and repaying it early can be very expensive.
• In the case of a SARON mortgage, the interest rate is linked to the SARON – this reference rate is recalculated on an ongoing basis. Unlike a fixed-rate mortgage with a fixed interest rate, the interest rate for a SARON mortgage can change regularly. The term is generally between 3 and 5 years.
  
• Variable rate mortgages have no fixed term. They're ideal if you are looking to sell or amortize the mortgage in the near future. but the interest rate is much higher than for fixed rate mortgages. 

As soon as you have found the right mortgage model, it becomes specific: Obtain three to five quotes from different providers for the same product and the same reference date. Compare the terms and conditions, making sure to read the small print as well. Here you'll find out everything important if you're interested in a mortgage with AXA.

How high are the maintenance costs of a house?

Banks calculate that maintenance and ancillary costs for a house are between 0.7 percent and 1 percent of the total value. For a single-family home valued at CHF 1 million, this would mean CHF 10,000 per annum. Even if this amount seems high, it's realistic: building insurance, water and sewage, fuel and garbage disposal as well as maintenance, repairs and replacement of appliances - it all adds up. For older properties, maintenance costs of up to 2.5 percent should be factored in.

Should I amortize a second mortgage directly or indirectly?

The second mortgage must be repaid within 15 years. This can be done in two ways:

1. Direct amortization: you repay an agreed amortization amount every year. 
2. Indirect amortization: you invest in a pension plan to build up the necessary capital. This insurance policy with an investment component is pledged to the mortgage lender. When the policy matures, the payout is used to repay your second mortgage.

Direct amortization reduces the mortgage debt and interest burden, However, the tax burden is increasing due to falling debt interest rates. 

With indirect repayment, the mortgage debt, interest expense and tax liability remain the same. Thanks to integrated insurance coverage for insurance solutions, affordability is guaranteed in the event of disability or death. 

Can I keep my house despite retiring?

Even though the second mortgage is supposed to be paid off before you retire, housing costs drain the limited budget of retirees. In this instance, you have three options:

• Voluntary amortize the first mortgage to reduce interest payments
• Pay into your pension fund to increase retirement income
• Buy a life annuity to increase your retirement income (by converting savings assets into a lifelong pension) 

Reviewing your advance planning for retirement should help you decide on the best solution for you. Either way, however, you must have saved the necessary capital in good time. You should therefore take advantage of the times in which you can set something aside. A good way of doing this is through Pillar 3a – ideally in conjunction with term life insurance.

Are there any other tips for buying a house?

The funding is by some way not the only relevant factor when it comes to home ownership. A number of factors have to align for you to be happy with a property over the long term. This blog post gives you helpful tips on what other aspects you should consider when it comes to buying a house in Switzerland. In any event, it's worth waiting for the offer that suits you best.

In the meantime, you can calmly prepare the funding for your own home. Our affordability checklist will guide you through this process.