Mortgage: The own capital requirement

Banks finance 80% of the purchase price at most. You must always raise the remaining 20% yourself

You cannot buy real estate without own capital. Swiss banks finance 80% of the purchase price at most. You must always raise the remaining 20% yourself.

All of the numerous mortgage models and term options Swiss banks offer to finance real estate have one thing in common: They cover 80% of your financing needs at most. In Switzerland, full financing – in other words, buying real estate without own resources – is not possible. If you compare your available own capital with the asked purchase price, you can calculate the so-called loan-to-value ratio.

Own capital and affordability

Since the revised Swiss Capital Adequacy Ordinance (CAO), which was published by the Swiss Financial Market Supervisory Authority FINMA in June 2012, home buyers must be able to provide at least 10% of the purchase price – half of the required own capital – for mortgage financing. These so-called “real own resources” can be gathered from various sources, such as personal savings, securities, or an advancement of inheritance. It is highly advisable to keep a reserve for unforeseen costs – buyers should not invest all of their assets in purchasing real estate. When financing owner-occupied properties, the remaining 10% can be pledged or received in advance from the buyer’s pension fund.

The less own capital you provide, the more expensive real estate financing is. This is due to the Swiss banks’ risk calculation: The risk of incurring losses through possible payment defaults increases as the proportion of own capital decreases. Banks thus increase the interest to compensate for the increased risk. The existence of the required own capital is not enough; an additional basic rule stipulates that after buying a property, the burden imposed by the mortgage rates, reserves for maintenance and the amortization of the second mortgage should not exceed one third of your income. This is based on the so-called affordability calculation.

A sample calculation

You’ve found your dream home and want to buy it for CHF 800,000. Thanks to securities and your savings account balance, you can provide the required 20% own capital in the amount of CHF 160,000. You thus need financing for CHF 640,000, which comes to a loan-to-value ratio of 80%. Swiss banks usually divide this borrowing requirement into two mortgages. Two thirds of the purchase price – 66% – are financed through a mortgage for CHF 528,000. The remaining 14% are financed by a mortgage covering the amount of CHF 112,000.

When calculating affordability, compare real estate costs like interest payments, amortization and running costs to your income. To allow for possible increases in interest rates, apply a relatively high interest rate. This so-called imputed interest rate is usually 5% for the first mortgage and 6% for the second (some Swiss banks also apply 5%). Let’s assume that without any rewards or bonuses, your total income is CHF 150,000. Then, affordability may not exceed CHF 50,000 per year. In this example, the annual interest costs come to CHF 26,000 for the first and CHF 6,720 for the second mortgage. The amortization of the second mortgage within 15 years or before retirement amounts to CHF 7,500, and running costs and maintenance come to CHF 8,000 (1% of the market value). This means that in total, you will have to pay CHF 48,620 real estate costs annually. The affordability thus comes to 32.4%, which means that you can afford your dream home.

Special provisions for older debtors

Most Swiss banks do not grant large loans to home buyers who have reached a more advanced age before being able to raise the required own capital, and who want to buy a property at the age of 60 or 70. These buyers also have to make amortization payments far more frequently than in younger years. All mortgage holders should think ahead and keep the date of their retirement in mind. This is because Swiss banks have a special provision demanding that debtors reduce their mortgage to 65% of the property value before retirement. An important aspect that must be included in your financial planning from the start.