What are the basic rules of real estate financing?
The purchase of a property represents for many the dream of a lifetime, where the beginning of a relevant investment strategy. You will first ask yourself if you can afford it? And how you will finance this investment. At Cardis Sotheby's International Realty, we are here to help you answer these and all the following questions.If you have a large financial contribution, it will inevitably go faster according to the limits of your budget. Otherwise, rest assured, access to the home of your dreams is closer than you think thanks to the mortgage loan. Even before you start looking for the property, it is essential to set a realistic budget. It is then up to the financial institutions to determine whether your situation allows you to absorb the costs of a possible mortgage loan, and if so, to grant it to you. You will find below the basics of real estate financing: how to determine your purchase potential, what are the basic rules applied by most banking institutions, and finally, how to proceed with the purchase of a property without having the necessary 20% equity.
Step 1: How to determine your available equity capital?
You must finance at least 20% of the value of the property with equity. 10% of the value of the property must come from personal savings from either your savings account or your 3rd pillar (in this case, a repayable loan or consumer credit is not possible). To this, it is possible to add 10% or more from the 2nd pillar, also called LPP or compulsory occupational pension provision. The latter is mainly used to finance retirement, but it can also be used for a property purchase. Contact your pension fund to find out how much money is available for the promotion of home ownership and the possible consequences for it if you use more than 10%. Our experts are at your disposal to help you determine your available equity.
- Personal savings: CHF 60'000.-
- 3rd pillar insurance with a surrender value of CHF 20,000.
- 2nd pillar state: CHF 200,000, of which CHF 180,000 is for the encouragement of home ownership.
If you use CHF 100,000 from your 2nd pillar, your equity is therefore CHF 180,000.
Step 2: How to calculate your purchase potential
The basic rule is as the following: equity must represent at least 20% of the value of the property to be purchased, of which 10% must be in "cash". If your equity capital represents 180,000 (cash, 2nd and 3rd pillar), you will be able to invest a maximum of 900,000 in a property with a value of 900,000. You can use an amount from the higher 2nd pillar (e.g. 180'000.-) to target a property at a higher price but you must evaluate the impact on your retirement fund.
Step 3: How to determine your financial burden?
In relation to your equity and your amortization capacity, your bank will define the term of the loan, the type of rate and the mortgage loan split. Your financial institution will calculate your borrowing capacity at a theoretical rate of 5%. The reason for this figure is based on a possible increase in rates. It is therefore a kind of security. Currently, rates are very low. They can be negotiated at 1% over 10 years. Do not hesitate to contact the experts at Cardis Sotheby's International Realty to find out more about the current state of the market.
Mortgage loan: CHF 900'000 - CHF 180'000 = CHF 720'000.-
- Theoretical annual interest: CHF 720'000 * 5% = CHF 36'000.- (CHF 3'000.- per month)
- Effective annual interest: CHF 720'000 * 1% = CHF 7'200.- (CHF 600.- per month)
The imputed interest (1) is the interest that the financial institution will use to assess your borrowing capacity. The effective interest (2) of the mortgage loan is the actual charge that you will have to pay monthly.
When making a loan, banks generally require an amortization of about one-third of the value of the asset over 15 years. There is nothing to prevent you from increasing the amount of amortization depending on your income. If you amortize (reduce) your mortgage debt quickly, you will also reduce your interest payments. In their calculations, the banks estimate that amortization represents about 1% of the amount borrowed.
- CHF 900'000 * 34% = CHF 306'000.- = amount to be amortized over 15 years
- This amount must be deducted from the part of the equity you have already invested, i.e.: CHF 306'000 - CHF 180'000 = CHF 126'000.
- Annual amortization : CHF 126'000 / 15 = CHF 8'400.- (or CHF 700.- per month)
Condominium owners charges
Maintenance and ancillary charges represent about 1% of the value of your property. Ask ou agents before buying a property to obtain the settlement and the accounts of the PPE in the case of an apartment purchase. They will tell you the effective annual charges for your property.
Annual condominium owners charges: CHF 900'000* 1% = CHF9'000.- (or CHF 750.- per month)
Effective financial expense
Your actual financial burden is as follows:Mortgage interest + Amortization + Condominium owners charges
Mortgage interest (CHF 10'800) + Amortization (CHF 8'400) + Condominium owners charges (CHF9'000) = CHF 28'200.- or CHF 2'350.- per month.
Step 4: Determination of income
When you go to your bank (or an insurance or pension institution), be aware that the most important point for your creditor will be to assess your ability to meet your financial obligations over the entire duration of the loan until it is repaid. Therefore, it is not enough to arrive with a contribution of at least 20%, the financial charges (theoretical interest + amortization + PPE charges) of your future property must not exceed 33% of your gross income. This is the "one-third rule". And it is applied by the majority of banking institutions. Elements such as the fluctuation of interest rates or the stability of your professional career may also come into play when you are evaluated by the bank. At Cardis Sotheby's International Realty, we make sure that you arrive at this stage with a solid file in order to obtain your mortgage loan.
Example of theoretical financial burden calculation
Theoretical mortgage interest (CHF 36'000) + Amortization (CHF8'400) + Condominium owners charges (CHF 9'000) = CHF 53'400.- Minimum gross income to obtain financing: CHF 53'400.- * 3 = CHF 160'200.-.-
CHF 160,200 is the gross income that you must justify. Although banks can sometimes be strict about granting mortgage loans, it is important to note that with the guidance of a real estate professional such as Cardis Sotheby's International Realty, anything is possible!
Our expertise, our analysis, our knowledge of the workings of the bank financing system are at your service.