How to finance your dream home in Switzerland: Key insights and expert tips

Budget planning: how much can I afford?

These days, hardly anyone can afford to buy a house or an apartment without taking out a mortgage. Fortunately, banks and financial institutions offer mortgages to help make the dream of homeownership a reality. However, obtaining a mortgage comes with certain conditions that must be met.

For a bank to provide financing for your home, the following conditions must be met:

At least 20% equity

A mortgage can cover a maximum of 80% of the total property cost. The remaining 20% must come from your own funds. Additionally, at least half of this equity (10% of the total price) must consist of liquid assets, such as cash or savings deposits, early inheritance, securities (like stocks and bonds), monetary gifts, accumulated savings from Pillar 3a

In short, liquid assets are funds that can be quickly converted into cash. The remaining 10% of the equity can come from withdrawals or pledging of Pillar 2 pension fund assets.

Example: Let’s assume you want to buy a house that costs CHF 1 million. In this case, you would need at least CHF 200,000 in equity. Of this amount, at least CHF 100,000 must come from liquid assets.

Purchase price: CHF 1,000,000
Total equity: At least CHF 200,000
Of which liquid assets: At least CHF 100,000
Mortgage: CHF 800,000

Long-term affordability

Once you have sufficient equity from the various sources, there is another important requirement for a mortgage: a high enough income to be able to afford to keep your house or apartment in the long term. This is referred to as the affordability of the property.

Your property comes with ongoing costs that you must cover. These include, among other things, maintenance costs, utility bills, as well as interest and amortization of the mortgage. Financial institutions calculate these so-called housing costs according to the following rule of thumb: The total expenses should not exceed one-third of your household's gross income. To be on the safe side, banks typically assume 5% mortgage interest and 1% of the purchase price for maintenance and utility costs.

Example: Let’s assume again that your desired property costs CHF 1 million and you take out a mortgage of CHF 800,000. Each year, you want to amortize CHF 10,000 of your mortgage. In order to obtain the corresponding financing, your household must have a gross income of at least CHF 180,000 per year.

Mortgage interest costs: CHF 800,000 x 5% = CHF 40,000
Utility and maintenance costs: CHF 1,000,000 x 1% = CHF 10,000
Total housing costs: CHF 40,000 (Interest) + CHF 10,000 (Utility and Maintenance) + CHF 10,000 (Amortization) = CHF 60,000
Minimum gross income: 3 x CHF 60,000 (Housing Costs) = CHF 180,000

What types of mortgages are there?

In Switzerland, there are various types of mortgages, with three basic forms being distinguishable:

• Fixed-rate mortgage: The term and interest rates are fixed for 1 to 25 years. The fixed-rate mortgage is the most common form of financing for purchasing a home in Switzerland.

• Variable mortgage: No fixed term, typically cancellable within 3 or 6 months. The interest rate is linked to the capital market and therefore fluctuates.

• Money market or SARON mortgage: The SARON (Swiss Average Rate Overnight) is a reference interest rate based on actual transactions between banks. It essentially represents the interest rate at which banks lend money to each other overnight. As a result, SARON is a variable interest rate that fluctuates accordingly.

Mortgage with a long or short term?

In addition to choosing the right type of mortgage, it's important to choose the appropriate term. Whether a long or short term is better depends on your individual situation and risk tolerance. Both options have distinct advantages:

Advantages of a long mortgage term:

• Stability in monthly payments
• Long-term planning security
• Protection against short-term interest rate hikes

Advantages of a short mortgage term:

• Flexibility in reacting to interest rate changes
• High repayment rate, leading to quicker repayment
• No additional fees for long terms
• Easier transition to another provider

Taking out a mortgage: How does it work and what should I consider?

Have you found your dream home, and does your budget align? Then there are a few important points to keep in mind when taking out a mortgage for financing.

First and second mortgage

If you meet the requirements for a mortgage to purchase your home, the financing will usually consist of two mortgages. The first mortgage covers up to 65% of the purchase price. If your own funds and the first mortgage are not sufficient to cover the purchase of the property, the remaining amount is financed through the second mortgage (up to a maximum of 15%).

Mortgage amortization

While the first mortgage does not necessarily need to be amortized, you are required to repay the second mortgage within 15 years or before retirement at the latest. You can choose between direct or indirect amortization. With direct amortization, you repay the mortgage in regular installments to the bank, gradually reducing your debt and interest burden. However, you can claim less debt on your taxes, which increases your tax liability.

If you choose indirect amortization, your payments are initially directed to a pillar 3a retirement account. This means the amount of the mortgage stays the same, and you can deduct both the contributions to pillar 3a and the mortgage interest from your taxes. The capital accumulated in this way can later be used to pay off the mortgage in full. Which option is better depends largely on your financial situation and tax considerations.

Market value as the basis for financing

As mentioned, your bank will finance a maximum of 80% of the total amount for purchasing your home. However, there’s an important detail: your bank doesn’t base the financing on the purchase price, but on the so-called market value. This is the value of the property assessed objectively. If the market value is lower than the purchase price, you’ll need to cover the difference yourself.

Example: Let’s assume the house costs 1 million CHF. If the market value is assessed at 900,000 CHF, the bank will finance a maximum of 80% of the 900,000 CHF, not the full 1 million. Instead of an 800,000 CHF mortgage, you would only receive 720,000 CHF and would need to cover the 80,000 CHF difference yourself.

Home ownership or mortgage in retirement

As long as you're working, you have enough income to finance your property. But what happens when you retire? To ensure you can continue financing your home in retirement, you should start planning in detail at least by the time you turn 50 and seek advice from your mortgage institution. Also consider any potential renovations for age-appropriate living, which need to be planned and budgeted for early on.

Joint property purchase

Are you planning to buy a property with your partner? In that case, there are various options for registering joint ownership in the land register. It also matters whether you're married or in a registered partnership.

Special case building mortgage

How does financing and the mortgage work if you're building a house instead of buying an existing property? In this case, you'll still need external capital, which will be provided by a bank – but typically, a building mortgage is used. This is a type of overdraft mortgage: When you take out a building mortgage with a bank, a current account is opened, and you deposit your equity into this account.

All invoices related to your building project will be paid from this account. First, from your equity and then gradually from the mortgage. Once your equity is used up, you'll essentially overdraft the account up to the agreed limit. For the amount you borrow (i.e., the sum by which you go into the negative), you'll pay interest. This flexibility is, of course, advantageous, as it's impossible to predict the exact amount needed for a building project.