The Complete Guide to Mortgages in Switzerland
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In Switzerland, mortgages are not as simple as they should be! So, in this complete guide, I will share all there is to know about mortgages in Switzerland and how they work.
For instance, did you know that most people keep their mortgages forever in Switzerland? And did you know you could use your retirement money to buy a house?
Before you buy a real estate property, you must know about mortgages. You do not want to go to the bank without knowing first a few things. Otherwise, it could be easy for them to give you a bad deal.
Mortgages in Switzerland
Mortgages in Switzerland are complicated. While the basic idea is straightforward, there are many refined principles about them.
If you are planning to buy a house, it is essential to know as much as possible about mortgages. You do not want to get a bad deal from your bank because you do not fully understand what something means.
The most distinctive nature of Swiss Mortgages is that they are generally not repaid! In most countries, people are fighting to repay their mortgages entirely. But in Switzerland, most people will not reimburse more than 35% of the house value. And they will keep a mortgage for life.
The reason is the strong relationship between mortgages and taxes. It is essential to know this before you ever think of taking a real estate loan.
How much can you borrow?
An important topic is understanding how banks are computing how much they can lend to you.
There are some strict rules based on your income level. Generally speaking, with a higher income, you can pretend to a higher mortgage.
Now given the current record-low rates, you could think that you can afford a mortgage on luxury houses. And in practice, this is probably true. But the affordability computation is done using theoretical rates. The idea is that the bank does not want to lend you money if you cannot afford a rate hike.
So, banks currently use a 4.5% theoretical interest rate as a reference. Some are even using a 5% sample rate. On top of that, they are accounting for 1% amortization per year. And depending on the bank, they will account for between 0.5% and 1% in maintenance costs.
For instance, our bank, Migros Bank, used a total of 6.2% as the rate for computing the costs.
I do not understand why these rates are so high currently. The interest rates in Switzerland have never stopped falling in the last ten years. But this is not something we can do anything about. These high theoretical rates will highly limit your capacity to get a loan.
Once they have calculated the total costs of your house, this total must be lower than 33% of your income. So, in our case, 6.2% of the mortgage needs to be smaller than 33% of our income. You need to take 6.2% of the value of the loan into account, not the value of the house. In general, the mortgage will be 80% of the house value.
Depending on the bank, how they compute your income is slightly different. But in most cases, they will consider your previous year’s taxable income. And there are some exceptions. For instance, in my case, they refused to take my bonus into account because I could not show up for three years of bonus payment. If we had waited one more year, we could have afforded a significantly more expensive house.
Based on that, you can easily compute how much you can afford: House =(Net Income / 3) * (1/0.062) * (1/0.8). If your bank uses another theoretical rate, you can just change the 0.062 by the other rate. For instance, an income of 100’000 gives a maximum value of 672’043 CHF. It should give you a rough idea of how much you can afford.
It does not mean that you cannot afford more. If you want to borrow more than that, you will have to increase the downpayment you put down. By doing so, you will reduce the amount of mortgage and reduce the theoretical costs. But there is not much advantage in doing so.
If you want a higher mortgage, your best solution is to increase your income.
Downpayment – How much cash do you need?
The bank will not provide the entire value of the house as a mortgage. You must pay a part of the house’s value in advance. This advance payment is called a downpayment.
The reason for a down payment is to force people to save for a house. Authorities do not want to make it too easy for people to get a house if they cannot save money.
You must pay 20% of the house’s value in advance. So, your mortgage will be 80% of the house’s value. You could have a larger downpayment. But as we will see later, it is not always beneficial to do so in Switzerland.
At least half of the downpayment must be in cash. And the rest can come from your retirement money. To be precise, you can withdraw from your second pillar and your third pillar.
If you are younger than 50, you can withdraw your entire second pillar. If not, you can withdraw the money you had in your second pillar when you were 50 (or half of your second pillar when you withdraw, whichever number is higher).
Of course, you need to consider that this will reduce your retirement income. Also, regarding the second pillar, you cannot deduct voluntary contributions from your taxable income. You will first have to repay your withdrawal. And the voluntary contributions you made in the last three years cannot be withdrawn for a real estate property.
There are still a few solutions if you do not have 10% of the house in cash. However, if you cannot get this cash, you may want to wait or not buy a property. Otherwise, You could withdraw money from your family (never a great idea). Or you could even take another loan to get the cash. This last solution is quite risky and will increase your interest.
I would recommend you make a plan to save enough cash for the house. 10% of the property’s value is not that much if you can save enough income. And if you do not know where to start, I have a few tips to save money in Switzerland.
Other fees
The downpayment will not be the only thing you must pay in cash.
When you buy a house, you will have to pay several fees:
- Notary Fees
- Property Transfer Fees
- Real Estate Acquisition Taxes
- etc.
You can expect to pay about 5% of the house value in extra fees. It is very important to consider these fees since you will need to pay them in cash. Some banks may accept this into the mortgage, but it is rare.
So, before you plan to buy a real estate property, you should be ready to pay 25% of the house value yourself. And 15% should be in cash, not in retirement assets.
Amortization – Repay the mortgage
When you take a mortgage, you must repay 15% during the first 15 years.
So, every year, you will pay 1% of the value of the mortgage (not the value of the house). This money will get removed from the loan. As such, the interest you pay yearly will decrease over the first 15 years.
If you paid more than 20% as a downpayment, you would have less to amortize. You need your loan only 65% of the house’s value in the first 15 years.
While amortization should be simple, there are two amortization methods in Switzerland.
Direct Amortization
When you amortize your mortgage directly, you simply give money to your bank to reduce your debt.
Direct amortization is very simple. All the money you use will reduce your debt accordingly. And the interest you have to pay will be reduced as well.
Direct amortization is the standard amortization method that is used in most countries.
Indirect Amortization
The second option is to amortize indirectly through a third pillar.
Instead of giving money to your bank, you invest money into their third pillar. If you fail to pay interest payments, the bank has a right to these third pillar funds. And when you reach retirement age, the bank will use the money to amortize the mortgage.
Indirect amortization can also be done with a third pillar in life insurance. You can keep your current insurance policy and invest in it instead of amortizing the debt. And then, the bank will have a right on the insurance money if necessary. You must be careful because life insurance third pillar is generally a very bad investment.
When you amortize indirectly, your debt is not reduced. So, you will continue to pay the same amount of interest every year.
Indirect vs Direct
With direct amortization, your debt will be reduced, and you will pay less interest each year. It is not the case with indirect amortization.
So, why does that option exist? It exists for taxes. You can deduce your interests from your income. So, if you reduce these payments, your taxes will be increased. Also, the money in your third pillar is not counted toward your wealth tax.
So, it is more tax-efficient to delay the actual amortization.
Now, there is a disadvantage to indirect amortization that many people do not consider. The bank will not let you invest in the third pillar of your choice. They will force you to invest in their third pillar. And in some cases, they will force you to invest in cash-only third pillars.
If you have access to a cash-only third pillar, you may lose a lot of returns. But if you have third pillars with high stock allocation with this bank, the tax optimization part should compensate.
Generally, banks will also let you do a mix of direct and indirect amortization. So you have some margin of freedom with this.
So, you could lose a lot on your returns on this money by doing indirect amortization. So, it is essential to consider the pros and cons of both methods before choosing. And make sure to discuss also their third pillar options when you are doing that.
Examples of mortgages in Switzerland
We now have all the basic keys to run some examples:
- We know how banks compute how much people can afford
- We know we have to give 20% in cash in general
- We know we have to amortize 1% per year
- We know current rates are low, so we can use 0.8% as the real interest rate
- We can estimate the upkeep costs to 1% of the value of the house per year
So, here a few examples:
| Property Value | 500’000 | 750’000 | 1’000’000 |
|---|---|---|---|
| Downpayment | 100’000 | 150’000 | 200’000 |
| Mortgage | 400’000 | 600’000 | 800’000 |
| Sample Interest 5% | 20’000 | 30’000 | 40’000 |
| Amortization 1% | 4’000 | 6’000 | 8’000 |
| Upkeep 1% | 5’000 | 7’500 | 10’000 |
| Real Interest 0.8% | 3’200 | 4’800 | 6’400 |
| Sample Fees | 29’000 | 43’500 | 58’000 |
| Necessary Income | 87’000 | 130’500 | 174’000 |
| Real Fees / Year | 12’200 | 18’300 | 24’400 |
| Real Fees / Month | 1016 | 1’525 | 2’033 |
We can see from these examples that real monthly fees are currently really low given the current mortgages. On the other hand, the amount of income necessary for getting a mortgage is currently very high. It would be very easy to pay for a one million mortgage, but very few people would be approved for such a mortgage.
From these three examples, you can estimate where you are and what you can afford.
Kinds of mortgages
There are several kinds of mortgages in Switzerland.
The first kind of mortgage is the fixed-rate mortgage. This kind is the simplest. You fix the interest rate for a specific number of years. For instance, you could get a 1.2% fixed-rate mortgage for 20 years. It means that during these 20 years, you will pay 1.2% interest on your debt yearly.
The second kind of mortgage is the LIBOR mortgage. This kind of mortgage follows the LIBOR reference interest rate. It has a short duration (one to five years) and a change frequency (from one month to 12 months). If you have a frequency of one month, your interest rate will be adapted to the LIBOR rate every month.
The third kind of mortgage is the variable mortgage. Compared to the other kinds of loans, it has no duration. And the interest rate is also variable. However, the rates are significantly higher on this kind of loan. Since the rates have become lower these last years, this mortgage has become less popular. It makes little sense to use this kind of mortgage these days.
Which mortgage you should choose depends on your capacity to handle changes in rates. If you have a strong ability to handle risk, you should take a short-term mortgage or a LIBOR one. If you do not have a large capacity for changes in interest rates, you should try to use a longer-term mortgage.
You should also know that you can combine several kinds of mortgages. You could get a 5-year mortgage combined with a 10-year mortgage. If you do so, you should ensure that your loans will get renewed simultaneously.
For instance, you do not want to take a 4-year loan with a 7-year loan. You will never be able to change banks or cancel your contracts. A 2-year with a 4-year should be fine as well as a 5-year with a 10-year. But avoid a 3-year with a 5-year.
You need to be sure not to be locked with the same bank for too long.
LIBOR and SARON
The LIBOR (London Interbank Offered Rate) comes from the financial regulatory body of the United Kingdom. However, they have decided to stop this rate by the end of 2021.
So, some banks have already stopped offering LIBOR mortgages. And many people wonder what will happen to their existing mortgages.
Banks have decided to replace LIBOR with the SARON (Swiss Average Rate Overnight). The SARON is a daily interest rate developed by SIX and the Swiss National Bank (SNB).
We do not yet know all the details of the change to the SARON. But most banks expect that this will work mostly in the same way as a LIBOR mortgage. Also, since this is a Swiss interest rate, many people expect a higher level of transparency than the LIBOR. But we will have to wait and see.
Banks vs Insurances
Something surprising is that banks are not the only ones to offer mortgages. Large insurance companies in Switzerland are also offering them.
There are some differences in what they can offer you. For instance, insurance will generally only offer fixed-term mortgages. But they have some interesting offers with really long-term contracts.
Another big difference is that most insurers will not accept your retirement funds as a downpayment. It means that you will need 20% in cash. It is a blocker for many people.
If you have enough cash (or if you do not want to use your retirement funds), you may consider offers from insurers as well as from banks.
Withdraw or Pledge your retirement money
There is one extra special thing about using your retirement money for your mortgage. You have two choices, either you withdraw the money or you pledge it.
If you withdraw the money, it will be effectively removed from your second (or third) pillar. And it will use as payment to the seller. Doing so will effectively reduce your debt since you already paid it.
If you pledge the money, it will not be removed from the account. This money will act as a guarantee for the bank. In that case, it will increase the debt you have. If you pledge 10% of the house’s value from your retirement, you will have 90% in debt. It means that you will pay more in interest, and you will have more to amortize.
On paper, it seems like withdrawing has more advantages. But there are a few specific advantages to pledging your retirement funds:
- You will keep your retirement income.
- You will still be able to make tax-advantaged voluntary contributions to the second pillar.
- You will pay fewer taxes since your interests are higher.
- You will not pay taxes on the withdrawn amount (but you will pay taxes later on anyway).
Which one you choose will highly depend on your financial situation:
- Can you afford to pay more every month?
- What is your marginal tax rate?
- What kind of returns does your second pillar generate?
- Do you want to make voluntary contributions to your second pillar?
- Are you close to retirement?
I do not think there is a huge difference between the two models. If you are getting close to retirement, it may become important. But if you are young and your second pillar is bad (like most people), I think it is better to use it. That way, you will save more money every month, and you will be able to invest it at higher returns than on your second pillar.
Should you repay your mortgage?
In Switzerland, we have a system that puzzles many foreigners. Indeed, most people never repay their debts! You can keep 65% of the debt on your house forever!
In most countries, people will tell you to repay your entire debt. But in Switzerland, this is not efficient. Indeed, this will increase your taxes. And since interest rates are currently very low, there is not much value in reducing it. The value is better invested in stocks than in a mortgage.
For instance, if your marginal tax rate is 40% and you reduce your interest payments by 100 CHF per year, you will only save 60 CHF per year. So, this reduces the value of putting money in your mortgage.
So, in Switzerland, you should probably not repay your mortgage. There may be some cases where it makes sense to do so. But these are exceptions rather than the rule.
Renew your mortgage
Except for variable mortgages, all kinds of mortgages have a duration.
At the end of the duration, you will have to renew the mortgage. It means you will have to choose once again a mortgage. If you are lucky, interest rates may have gone down. So you will be able to renew your debt at a lower interest rate. If you are not fortunate, you will have to pay more.
You should choose again according to your financial capacity. If your situation changes, you might want a different contract than before.
When you renew a mortgage, you also have the chance to change banks. If you are not satisfied with the offer from your bank, you may want to change to a new bank. You could use offers from other banks as leverage to get a better offer from your current bank.
There is something fundamental about renewals. When you renew your contract, the bank will examine your financial situation again. They use almost the same calculations as to when you buy the property. If you cannot afford a new mortgage, the bank may force you to sell.
If you are in small financial trouble, they may be understanding. But you have to be careful about that. You can use longer durations if you expect your income to fall in the future.
Sell your property
You need to be careful with your mortgage when you sell the property.
There are two different situations. It will depend on whether you buy a new property or not.
If you buy a new property, your bank will generally let you transfer the mortgage to the new house. Based on the value of the new house, you may have to add some cash again to the deal. But in general, this can be done during the duration of the mortgage. You do not have to wait until the renewal of the contract. Of course, this will depend on the bank.
If you do not buy a new property, you must cancel your contract. It may be more complicated than you think. If you cancel a mortgage before the end of the duration, you will have to pay penalties. These penalties can be quite significant based on bank conditions. It could easily reach 50’000 CHF. So, you need to be careful about the terms of the contracts if you plan to sell your property.
Mortgages and retirement
If you buy a house close to retirement, you need to be sure you can keep your property once you are in retirement.
As mentioned before, when you renew your mortgage, the bank will check again if your financial situation is good enough for this debt. And if it is not, it may force you to sell your property. And it can happen even though you are retired.
When you are retired, your income may be significantly lower than before. So, it may be difficult for your income to pass the test for debt at the theoretical rates.
If your income in retirement is enough, you will have no issue. But if it is not, you have several solutions.
The first thing you can do is to amortize your debt. While this may not make sense from a tax point of view, it could be a great way to reduce your debt to keep your house in retirement.
Another way is to rely on your kids if you have any. You could sell the house to your kids before retirement and rent it from them. Or you could ask them to guarantee the house. It means that if you cannot pay the debt anymore, your children will be responsible for it. It is not a great situation. But depending on your financial situation, it could be working well.
Now, it is better to avoid this kind of situation. For this, you need to plan your retirement. You need to make sure you will have enough income in retirement so that you can keep your mortgage.
Can a foreigner buy a house in Switzerland?
Several legislations in Switzerland restrict how foreigners can buy properties in Switzerland.
This will not directly impact mortgages, but it is important to know. It is better to know whether you can buy in Switzerland before contacting a bank.
First, if you are a resident of Switzerland, you can buy a house here as long as you live in it. But you will not be able to rent it out to other people. You have to live in it. Renting it out, even partially, is illegal.
In some cases, you can buy a holiday home in Switzerland as well. But there are many restrictions, so you will need special permission as a foreigner. For instance, there are quotas in Switzerland saying that less than 20% of homes can be holiday homes. And you cannot rent it out for the year, only periodically.
Finally, if you are commuting to work in Switzerland and come from the European Union, you are allowed (generally, there are exceptions) to buy a second home (non-holiday). You will not be able to rent it out, and you will have to live in it when you work in Switzerland.
Now, not all foreigners are treated the same. It depends on the kind of permit. If you have a long-term residency permit (C), you will be treated like a Swiss citizen, and you can buy and rent it out.
So, as you see, foreigners cannot invest in real estate in Switzerland. But they can generally buy a house to live in.
How to find the best mortgage?
Almost every bank offers mortgages in Switzerland. So, it is not easy to find the best mortgages for your property.
First of all, you should always compare several offers. If you are with a bank that offers real estate loans, you should ask them for an offer. However, you should not simply accept the first offer you get.
If you can, you should also try to get some offers from insurance companies. The more offers you get, the better your chance of getting the best offer for your situation.
There are a few comparators online for mortgages. But I only found one helpful comparator. The mortgage comparator from moneyland is good. However, since not all banks are there, you should still contact a few banks yourself.
Conclusion
This guide covers all there is to know about mortgages. If you already know all of this, you will be well ahead of most people.
It is essential to learn about mortgages if you plan to buy a property. You may be lucky and deal with a very honest banker. But there are many stories of people getting a bad deal from their bankers because they did not know enough before discussing it.
So, before looking for a real estate property, you must study mortgages. And once you know enough, you can talk with a banker. You need to have all the cards in your hands before that.
If you are decided to buy a real estate property, I have an entire guide on buying a house in Switzerland. And, if you are still undecided, I have a guide on whether you should buy or rent in Switzerland.
Do you any more tips on mortgages in Switzerland? Did I forget anything?
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Dear Mr. The Poor Swiss,
Thank you for this very helpful article!
I will soon be moving to Switzerland (Vaud) and would like to purchase a family home. We currently have another home in Australia that we are renting out will be paid off by our retirement so that we can have as another stream of income.
As we won’t have full 20% for a deposit, I am considering refinancing our Australian loan (we won’t have a problem with this) so that we can use this as part of our deposit in Switzerland.
My question is, would our property and liabilities in Australia be taken into consideration when we apply for a mortgage in Switzerland? Or do they just look at your salary and deposit in Switzerland?
Thank you in advance!
Mel
Hi Mel,
In most cases, they base their information on your latest tax declaration. In your case, you won’t have one unless you wait. But since your home should be in your declaration, I believe this liability and value should be taken into account.
But this is quite specific, so it may differ from one bank to another.
Don’t take too much risks!
Hi, Mr. The Poor Swiss,
First, I’d like to thank you for your dedication to this amazing website. It’s been very helpful for an expat like me. Now if I may, since you recently purchased your house, may I ask about the underwriting process?
In the US, most banks look at 2 months of bank statements but here, from what I read online, the bank may ask for 2-3 years of tax returns and bank statements…
Is this true to your case? I haven’t approached any lenders yet because I’m still deciding whether to buy a house here with my Swiss husband. Thank you for your help:)
Hi Val,
They definitely look at more than 2 months indeed. Our bank (Migros) did not ask for 2-3 years, but they asked for my employment contract and the last tax declaration. I also had to provide proof of the funds for the downpayment.
The only thing that needed to be there for 3 years was my bonus. They wanted to see it for 3 years in a row to take it into account (so they did not take it into account since I worked for less than 3 years at this time).
But this may vary from bank to bank and some may ask you for a few tax declarations.
Great post – very clear and well explained!
A question for you please. Our mortgage is split in 3 tranches and as you explained, this means we are stuck with the same bank, which offers non-competitive rates each time a tranche comes due. We have cash available to pay off a smaller tranche and we don’t want to invest that cash in any more stocks. However, we keep hesitating as Swiss generally keep their mortgages. Is it just for the tax deduction of the mortgage payments? Or is it that they don’t generally have the available cash?
Hi Jane,
It’s very difficult to say without seeing the numbers. How bad is your mortgage?
Swiss do not pay their mortgages generally for two reasons:
1) They do not have to
2) It’s not extremely interesting to do so since you can deduct your interest payments and they are low anyway.
Now, reducing your mortgage will reduce your interest payments. Depending on your current interest rate, it may not be a bad move. It is better to pay off your mortgage than to keep too much cash. Real estate has a change of going up in value and this will reduce your spending. So, if you do not want to invest this cash in stocks (and you do not need it for your emergency funds), then paying off some part of your mortgage may make sense financially.
Thanks very much!
So bottom line, even in Switzerland, if we
have the cash available, pay down the mortgage – even with the low interest rates right now?
In your case, I believe it makes sense, but investing would probably make more sense.
In general, I do not recommend paying off a mortgage in Switzerland since investing this money is generally more interesting. But currently, it beats cash.
Hello,
what about treating the house as an investment?
Let’s say you buy a house for 1.000.000 CHF. If you chose to repay only 35% of the mortgage, then you own 35% of the house and 350.000 CHF. If in 30 years the house value doubled and it costs 2.000.000 CHF. When you decide to sell it you are going to have 35% of it which is equal to 700.000 CHF. You will have already paid 350.000 CHF through the year to the bank so that’s 350.00 CHF.
On the other hand, if you decided to repay the whole amount, you are going to own the whole house and when you decide to sell you will get the whole 2.000.000. You will have repaid 100% of the original mortgage so that’s 1.000.000 CHF profit.
Those calculations are very simplified and they do include increased money spent due to interest rates etc but those factors can weigh on either of the arguments.
Just a thought I had. Did you look into it?
Hi Nick,
I don’t think these computations are correct.
Let’s say you have paid 35% of your 1M house. If you sell the house 2M, you only have to give 650’000 to the bank, that’s the amount you own. They do not own a share of your house, you owe them some money. And in case you don’t pay them, they have a right to the house.
In both cases, you have made 1M in profit.
Hello,
thanks. It looks like it is more complicated than my original understanding. So, when someone takes house with a mortgage they own 100% of the house and they just own the mortgage money to the bank? In this case, why do they have higher wealth tax if they repay the bank? If this is the case, since either they repay the loan or not, they have full ownership of the house, wealth tax should be the same in both cases. Probably there is something I am missing.
Hi Nick,
In theory, they own the entire house. But the bank has a right on the house with the mortgage. So, it’s not entirely correct to say that house owners own their houses. But the value of the house is theirs.
On your tax declaration, you have to declare the value of the house as fortune. But then, you can deduct the value of your mortgage. So, only 20% (at first) of the house’s value makes it into your net worth taxes.
Hi, Thanks for the nice post. So the <fond propre 20% +5% for the notary public etc at the beginning are heavy but once done and depending on the repayment of the mortgage say monthly deductions gets super low, lower than rent for sure for a similar house/apartment on rent. Why do they break the interest in three portions I.e. one for 15 years etc…
Also, they can allow if one wants to renovate some amount on top as it is value increase for the property.
My question is if your property gains value over the periods because of the works and the area development etc can you use the same downpayment an investment property and what are the penalties if at all?
Thanks a lot Pat
Hi Patricia,
It’s true that most banks will give you some extra debt (not free money, more debt) for renovations that would increase the value of the house.
I do not understand your question. If the property gains value, you can sometimes gets extra debt and then you can maybe use that extra money to make another downpayment on another house, yes. But I am really not a real estate investment expert, I only have experience about buying a house to live inside.
I have a question related to indirect amortization and 3rd pillar. I just can’t wrap my head around it. If we sell the house well before retirement, does the insurance company give a portion of this investment to the bank? If we buy another house, is there an impact on this? On a CHF 800’000 mortgage, I would love an example of calculation, assuming my husband and I pay the maximum deductible amount per year. I guess we will never see this money until retirement, if there is any left over. Last scenario, if I were to sell and leave the country, I should hopefully be able to take my 2nd and 3rd pillar’s with me, even though I am a Swiss citizen? I assume we would be taxed heftily once again. Thanks for any insight you can provide.
Hi Christine,
If you sell the house, you should get back the money and should be back the insurance 3a. And if you buy another house, you will be able to pledge the insurance again. At least, that’s what I think.
Normally, you will indeed never see the money until retirement. At retirement, some of this money can be used to amortize to an acceptable level.
If you sell, you will have to pay back the second pillar. And then, if you leave the country for good, you should be able to take your second and third pillars with you.
In theory, you should not be taxed twice on the money. Basically, when you put back themoney into the second pillar, you can get back the money you paid in taxes. So, you will only be taxed once on the second pillar and third pillar.
Does that clear it up? Your situation seems a bit complicated.
Hi Mr Poor Swiss,
Good article.
Can I get your opinion on this scenario?
Somebody going into retirement cannot meet the affordability checks.
So the bank takes a chunk of their Pillar 2 to reduce the capital outstanding? Now they have more equity (eigenkapital) in their house, but a smaller pension pot.
So they decide later to sell their house and rent instead.
Do they get to keep their equity from the sale of the house or do they have to pay it back into a pension fund?
Hi AP,
The bank cannot take a chunk of the second pillar. They can ask you to put more money into the house, but it’s up to you to use your second pillar (or cash) to amortize it further. They could also force you to sell the house if you are not able to amortize further.
If you use the second pillar to buy a house and then sell it, you need to pay back the money into your pension fund, yes.
Now, your situation is different and I am honestly not sure what would happen. In general, you can use the second pillar every few years to reduce the debt of a mortgage. If you then sell the house, I am not sure you are forced to reimburse the amount. But I would think yes.
You will have to contact your pension fund to get more information about that.
Hi, you say that most people will not reimburse more than 35% of the house value. Do you have a reference for that, or some numbers? It’d be interesting to know. Thanks.
Hi Nick,
That’s a well-known fact in Switzerland, but I was no able to find any reference either in French or in English about this. I will keep looking.
It would be interesting to get actual data on how long people are keeping their mortgage on average.
Excellent post. Really well explained. Thank you so much.
Thanks, Eduardo!
Mr. The Poor Swiss
First of all thank you for this great guide.
In your example for property value for 1 million CHF, with the 20% downpayment, it came out the yearly costs are 24400.
I have several questions.
1. Is this yearly cost for how long? 15 years? or until the 15% of the mortgage is reached, since it was mentioned that only this is obligatory.
2. What will be the yearly costs after 15 years? and for how long?
Thank you.
Greetings
Zoltan
Hi Zoltan,
That’s a good question :)
1) It’s actually only for the first year. The amortization amount will stay the same for the first 15 years. But every year, the interest payments will go down since you amortize. So, the second year, the 6400 CHF in interests will go down to 6336
2) After 15 years, you will have to amortize the minimum amount, so you won’t have to amortize any more (8000 CHF less). And your debt will only be 650’000 CHF, so your interest payments will go down to 5200 CHF. So, you should pay approximately 13200 per year.
And this is forever. You can still amortize your debt if you want to reduce your interest payment and your leverage, but there is little incentive in doing so.
Keep in mind that this is with an estimated upkeep of 1% per year. Some years will be more, some years will be less. It’s just an average. The guaranteed amount you are going to pay is 14’400 CHF the first year and 5200 CHF after 15 years.
Does that make sense?