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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Hi!
Thanks for this very detailed and specific post, it is really complete and amazing!
I have a question regarding of the fixed costs once you own a property because this is something that keeps me in doubt if it is at end owning something.
When you pay rent, it is just the rent.
When you buy a house in full, how much are the monthly/annual and permanent payments you have to do? How much is the annual tax? Do i require the lawn firma for my Garden (i have seen them everywhere that i wonder if this obligation), how much the home-Insurance? There are more taxes / insurances I should consider?
Thanks a lot!!!
Hi Erika,
What do you mean by buying a house in full? Without a mortgage? In that case, you have very little fees, but this will not be great for your taxable net worth. The annual tax will depend on each state and county and situation. I have no idea what’s a lawn firma.
I have written down all our costs for owning our house during the first year, this should help.
the tax on your net worth would take into account the entire value of the house regardless of the mortgage? or would only consider a part of the total value (say 20%) because you own the rest (say 80%)?
The taxable net worth includes the taxable value of the house and the mortgage. In our case, for instance, our house adds a negative value to our taxable net worth.
Dear The Poor Swiss
Thank you for your guide which explains it all in much simpler terms. I have a bit of different question. My husband is Swiss, though we don’t live in Switzerland. We are planning to move to Switzerland soon-ish. We are currently self-employed, but would rather be employed in Switzerland. We believe in owning rather than renting. We would have 20% in cash as a down-payment from the sale of our house in the country we currently live in, but how long of a work history would banks want to see to approve a mortgage? i.e. would we be able to apply as soon as we secure jobs, based on our proof of salary, or would we need to work for a year or more to have a longer salary history? We would like to have an idea of how soon we would realistically be able to buy a property.
Thanks
Sharon
Hi Sharon,
That’s an interesting question, and I do not know for sure. Our bank asked for three years worth of tax declaration, but I have heard that some banks asked only for 1 year. In any case, they always consider the big picture. If you have excellent financials, they may be more lenient on the work history.
At least, I would think you would have to rent for a year before buying.
If you want to be sure, you could already try contacting banks now to see what they would think. However, it’s true that most banks are not very motivated to discuss projects if you do not have a precise project in mind.
Thank you, I was also thinking it would be a year of renting. The advice is very helpful :)
Hi,
This is very informative, thanks!
I had two questions:
1) what happens to the money you pay into the indirect amortisation after 15 years for the mortgage II? Does the bank take it, or does it remain in your 3a and continue to be pledged to the bank?
2) is it possible to renew the mortgage in the middle of a cycle (eg 5 years into a 10 year mortgage?)
Hi mat
1) Normally, it remains pledged to the bank and it will only be used at retirement age if you need to amortize at this point.
2) Normally not, but banks could do that if they are willing. You can break the contract, but there are some strong penalties.
Hi Mr. The Poor Swiss,
Can you elaborate on this statement:
“Also, when you reduce your mortgage, you are increasing your net worth. So, you will also pay more taxes on your wealth.”
This makes no sense to me. Your net wealth doesn’t change whether you repay your debts or not. If you have 120k cash and 100k in debts, then your net worth is 120k – 100k = 20k. If you repay your debt, then you just have 20k in cash. Same net worth.
You also say that repaying the mortgage “will increase your taxes.” How? The net worth issue I’ve already described above. Smaller interest payments indeed mean that you get to deduct less from your income. However, even counting that your marginal tax rate is 35%, you still don’t have to pay the interest. So you’re effectively saving 65% of the difference.
I’d appreciate if you could clarify these points for me. Thanks!
Hi Tom,
Regarding net worth, you are right. Regardless of where your money here, it should be worth the same. I will update that part.
The taxes are increasing since you deduce less. Let’s say you have a 40% marginal tax rate, you are effectively losing 40% of the savings. So you are only saving 60% of the interest instead of saving everything. So, this reduces the value of paying back the mortgage. But yes, you are still saving net money. But it’s not as good as putting this money in something else.
Thanks for getting back to me!
I agree, I think we’re on the same page. It’s all about whether you can generate more than (100% – margin tax rate) * interest rate returns elsewhere. With today’s extremely low interest rates it’s almost always the case unless you’re extremely risk-averse.
Exactly!
You still save money, but there are better ways to invest your money :)
And it’s also a case of your asset allocation as you wrote it down. If you have 95% of your entire net worth in stocks, it could become interesting to lower your mortgage to reduce your stock allocation according to your risk profile.
If, instead of repaying your mortgage, you invest the 100k over the years into a 3a pillar, you will be paying wealth tax on those 100k.
That’s not correct.
You don’t pay wealth tax on your 3a.
Also, if you repay your mortgage, you lower your debt, making your wealth increase and then increasing your wealth tax.
https://www.ch.ch/en/housing/homeownership/buying-property/purchasing-property-in-switzerland-as-a-foreign-na/
the statement of not allowing renting the house seems to apply only on B permit.
“If you have a permanent residence permit (C permit), you have the same rights as Swiss citizens to purchase real estate. You do not need authorisation to purchase a house or land.”
so it means you can buy and rent as a foreigner
Hi Eric,
Thanks for letting me know, I will improve that in the article!
I never honestly understood much about this topic in Switzerland, and it was clear on so many different level. though something is still not clear…
1) Who own the house? in case you sell it for example, or inheritance.
2) you pay a mortgage for life? meaning you will either overpay the house or underpay it? therefore u replace your normal rent with mortgage for life?
1) In practice, you own it. As long as you pay the mortgage interests on time. But you only pay 20% of the house value, the bank lends you the rest.
2) That’s correct. You need to get your debt down to 65%, but after that, you can keep your debt for life. You can also repay it but it’s generally not efficient.
Thanks for the answers, though I still have doubts eheh…
1) Scenario: I pay 200k (20%) for a 1 million house, and I live in there for 30 years and pay back lets say 650k of mortgage back.
I now sell the house for 1.5 million.
Do I get back the 200+650 that I have paid so far and the rest the bank gets it, or the bank get the missing 150k that I should still pay in mortgage, and the rest it goes into my pocket?
2) if I die with my debt unpaid, and my children get the house, they start paying the mortgage for the rest of their life?
still feels weird as concept
Hi,
1) If you pay back 650k extra, you only have 150k left of the mortgage. So, when you sell, regardless of the value, you will have to reimburse that 150K. But the 500K in plus-value is for you.
If the house is only worth 500K at the end when you sell, you still have 150K left to pay back. The debt is not dependent on the value of the house.
However, if the value of the house falls, the bank may ask you to pay back more of the mortgage because they do not have a good collateral anymore.
2) If they get the house, they will have to get the mortgage as well, yes. They could pay it back of course. And if they sell the house, they will also have to reimburse the mortgage.
Hi,
Thank you for this very interesting piece. I am in the process of buying a house and have to choose between direct/indirect amortization or both. I feel the direct amortization with a 3a invested in stocks would makes the most sense but the bank told me they would only consider 50% of it for the amortization, the rest would have to be direct. Another suggestion was to amortize 50% indirectly to a not invested 3a (little revenue), 50% in direct, leaving 50% room to contribute to a stocks invested 3a (not considered in the amortization). I know its a though question but what do you think is the best amortization things all considered (taxes, 3a revenues, amortization, ..)
Hi Damien,
With such low interest rates, it makes little difference between direct and indirect honestly. If you cannot invest in a good 3a with stocks, don’t do indirect. 50% direct is perfectly fine.
Indirect is a small optimization since what you can deduce from your taxes is very small anyway. And it is a good idea to reduce the amount of debt anyway. So, I feel like 50% direct and 50% indirect is a good deal. This is what I did with my mortgage.
Dear The Poor Swiss,
Thanks for a very useful resource.
I am in the process of buying a house in Ticino and the seller has a mortgage with a lien shown in the land registry entry.
In contrast to the options in your section “Sell Your Property”, the sale contract transfers this mortgage liability to me.
The notary assures me that as the seller will pay off their mortgage with the proceeds from the sale, the asset of the mortgage (a financial instrument) will also be transferred to me, so I will effectively owe the debt to myself!
I do not see any compulsion in the sale contract for the seller to pay off the mortgage nor that the notary will pay that part of the proceeds directly to the bank.
Is this normal?
The notary and the agent are acting as if this is commonplace, but I don’t see what protects me against the seller not paying the bank and leaving me with their debt.
Many thanks
A quick update: the notary confirmed that he will be responsible for paying off the seller’s mortgage before any residual money is transferred to the seller, so I guess that is my protection, even though it isn’t in writing.
Hi Roger,
In general, I would trust a notary with this kind of thing. But having it on writing is indeed better.
However, I do not know this kind of thing. It seems weird that the mortgage is written in the land registry. I know the second pillar can be in the land registry to ensure it gets reimbursed.
And sometimes, some people sell a house with their mortgages, but that does not seem to be the case for you.
>But in Switzerland, most people will not reimburse more than 35% of the house value. And they will keep a mortgage for life.
I understand your point about reducing the wealth tax and investing in stock but are there any other disadvantages of fully reimbursing the mortgage (100%)? For example, a colleague mentioned that the tax authorities will calculate a virtual rental income and you’ll be taxed for it.
Hi Nik,
Currently, there are no big advantage in fully reimbursing the mortgage. You will pay more taxes and you won’t be able to deduct interest payments. If you are not investing at all, it may be interesting, but if you are investing, it is currently quite pointless with current interest rates.
The virtual rental income is added to your taxes regardless of your mortgage. Even if you pay it in full, you will have this virtual stupid income in your tax declaration.
Dear The Poor Swiss,
thanks for your precious guide, there’s just one thing which is still not clear to me: if I choose a mortgage with 15 year fix rate it will mean that I will renew my mortgage every 15 years?
As well as 5 years fix will be renegotiated every 5 yrs and 10 in 10 and so on…
And/or is there the possibility to renegotiate with higher frequency?
What would be your advice for the renewal frequency?
What did you take in consideration when choosing between different fix rate maturities? And between fix and floating?
Thanks
Hi Roberto,
It means you have to renew the mortgage after 15 years, yes. That also means that you have the opportunity to cancel or change to a new bank after 15 years.
If you choose 5 years mortgage, you have more opportunities to cancel/update the contract.
Some banks may be open to more frequent renegotiations, but generally, contracts are not touched during their durations.
In our case, the fixed was lower than the floating so it made sense to fix it for 5 years. I believe that between 5 and 10 years make sense. But for 20 years, there is a too much of a premium to pay. Now, if you can get a very good deal on a 20 years mortgage, it could be good. But I would prefer having some flexibility and lower fees, so 5 years was perfect for us.