Buying a home is many people’s dream, and is also likely to be the biggest purchase of their life. You may be wondering how to fund such a major investment. It may seem a daunting prospect, but where there’s a will, there’s a way! Most people will need to borrow money in order to fulfil their home-owning aspirations, so it helps to learn the basics of mortgage finance in Switzerland.
The first thing you need to do is set a realistic budget, even before you start house-hunting. Then it will be up to the financial institutions to decide if you can afford the costs of the mortgage you want, and whether to grant you it.
Here we explain the key steps to securing a mortgage in Switzerland: how to know what you can afford, what are the banks’ basic rules, and how to go about purchasing a property even if you don’t have a 20% deposit.
1st step: arrange your deposit
You are generally expected to have a deposit of at least 20% when buying a home in Switzerland. 10% of the property’s value must come from personal cash savings, held in your savings account or your private pension scheme, known as Pillar 3.
On top of this, you can add 10% or more from your mandatory occupational benefits scheme, known as Pillar 2 or LPP. This is mainly used to finance your old age pension but can also be used to buy property. You can speak to your pension scheme provider to establish how much money you can use for this purpose.
You can take more than 10% from Pillar 2 but it’s advisable to consult a financial advisor beforehand, to find out how it will affect your pension in the future.
You should also bear in mind that your deposit cannot come from a personal loan.
- Personal savings: CHF 60,000
- Pillar 3 insurance: commuted value of CHF 20,000
- Pillar 2: CHF 200,000, of which CHF 180,000 can be used to buy a home.
If you decide to use CHF 100,000 of your Pillar 2, your deposit will be CHF 180,000
2nd step: calculate what you can afford
The basic rule is as follows: your deposit must be at least 20% of the purchase price, of which 10% must be in cash. If you have a deposit of CHF 180,000 (cash, Pillars 2 and 3), you can afford a property worth up to CHF 900,000. You can use a higher Pillar 2 amount (CHF 180,000 for example) but you should consult a financial advisor to see how it will affect your pension in the future.
3rd step: calculate your financial costs
Your bank will decide the term of the loan, type of rate and how the loan will be split, based on your deposit and ability to repay. Swiss lenders will use a theoretical interest rate of 5% to calculate your borrowing capacity, in order to guard against any possible rate rise in the future. Interest rates are low at the moment, so now is a good time to lock in a low rate. For instance, you can negotiate a fixed rate of 1.5% over 10 years.
Mortgage: CHF 900,000 - CHF 180,000 = CHF 720,000
Theoretical annual interest: CHF 720,000 * 5% = CHF 36,000 (CHF 3,000 per month)
Actual annual interest: CHF 720,000 * 1.5 % = CHF 10,800 (CHF 900 per month)
The theoretical interest (1) is the figure the lender will use to assess how much you can borrow. The actual interest (2) is the amount you will actually pay every month. Here we’ve used an interest rate of 1.5% fixed for 5 years.
When granting a loan, banks in Switzerland usually require about one third of the property’s value to be repaid within 15 years. Of course, there’s nothing to stop you repaying more if you can afford it. The faster you pay off your mortgage, the less interest you’ll pay. In their calculations, banks assume that repayment accounts for around 1% of the sum borrowed.
CHF 900,000 * 34% = CHF 306,000 = amount to be repaid over 15 years
This amount is deducted from the deposit you have already put down, so
CHF 306,000 - CHF 180,000 = CHF 126,000
Annual repayment: CHF 126,000 / 15 = CHF 8,400 (or CHF 700 per month)
In Switzerland, there are specific maintenance fees for properties called PPE, which stands for Propriété par étages (literally meaning “'co-ownership by floors”). This is a particular form of co-ownership in which each co-owner has the exclusive right to use and renovate some internal parts of a building. These additional costs are generally around 1% of the property’s value. Before buying an apartment, we advise contacting your broker to obtain a copy of the building’s PPE rules and accounts. This way you can find out how much you’ll have to spend each year on maintenance and other costs, and avoid any unpleasant surprises!
Annual PPE costs: CHF 900,000 * 1% = CHF 9,000 (or CHF 750 per month)
Actual financial costs
Your actual financial costs are as follows:
Mortgage interest + Repayment + PPE costs
Mortgage interest (CHF 10,800) + Repayment (CHF 8,400) + PPE costs (CHF 9,000) = CHF 28,200 or CHF 2,350 per month
4th step: prove your income
When you approach a lender, the first thing they will want to do is assess your ability to pay your financial costs over the term of the mortgage, until the debt has been repaid.
As well as putting down a deposit of at least 20%, you must also make sure that the financial costs (theoretical interest + repayment + PPE costs) of your future property don’t exceed 33% of your gross income. This is known as the “one third rule”. If you can’t meet these criteria, the number of banks willing to lend to you will be limited.
The reason for this is that although interest rates may be low right now, they may increase in future. If you only put down a small deposit to start with, you might struggle to repay your mortgage, which is a liability for the lender. So they add up the interest, repayments and additional costs to make sure the total doesn’t exceed your monthly income.
Lenders vary in their approach to property maintenance costs, with some evaluating them more strictly than others. The same is true when it comes to estimating your future income, which can be quite subjective. Some banks analyse the likelihood of you losing your job (this might depend on your field of employment or your position), taking time off work (birth of a child, illness, etc.), or having a change of career.
At the end of the day, the amount you can borrow will depend to a large extent on which bank you approach. So it pays to shop around for the best deal. One thing is sure: if you can raise a deposit of 20% and follow the “one third rule”, you’ll be well on your way to a successful mortgage application.
Example (Theoretical financial costs) :
Theoretical mortgage interest (CHF 36,000) + Repayment (CHF 8,400) + PPE costs (CHF 9,000) = CHF 53,400
Minimum gross income to be approved for a mortgage: CHF 53,400 * 3 = CHF 160,200
So you will need to provide evidence of a gross income of CHF 160,200.
That said, bear in mind that although the banks can sometimes have quite strict lending criteria, you still have a good chance of succeeding if you ask a real estate professional to help you.
A mortgage expert will guide you every step of the way and help you to understand what is realistically possible in your situation. Their in-depth knowledge of how the Swiss banking system works can make all the difference here. Be sure to remember the “one third rule” discussed above and don’t forget, your income must be three times your housing costs.
I don’t have a 20% deposit but still want to buy a property. Can I do this, and if so, how ?
It’s a common misconception that you always need a deposit of at least 20% in order to buy a home. There are lenders who may agree to make an exception for you if your application is strong in other ways. What matters is that you can afford the repayments on your current salary. You can still become a homeowner with a deposit of 10 or 15%.
Another thing many people don’t realise is that acquisition costs can be at least 5% of the deposit required. Some lenders will include them into their finance plan, so your initial deposit doesn’t need to be so big.
There are also organisations in Switzerland called property guarantee cooperatives (cooperatives de cautionnement) which can lend you up to 10% of your deposit in cash. If you decide to go down this route, there are a few things to bear in mind: the interest rate might not be the most competitive, you can only borrow from a limited number of banks, and you won’t be able to negotiate on the purchase price. That said, this is definitely an option worth considering if you need to boost your deposit.