UBS Mortgages
Glossary.

 

Affordability

Affordability is the ratio between gross salary and expense on the real estate property. Affordability is expressed as a percentage and should not exceed one-third of gross salary. Expenditures comprise:

- imputed interest                                  (e.g. 5% of the mortgage amount)
- ancillary and maintenance costs     (e.g. 1% of the investment costs or market value)
- amortization

Amortization

Amortization is the repayment of a debt in instalments. Normally, mortgages are paid back at the rate of around 1% a year. For financing of more than two-thirds of the real estate value, the debt on two-thirds of the real estate value must be amortized in equal tranches (i.e. linearly) within a period of 15 years. Repayment can be agreed as direct amortization or indirect amortization.

Ancillary and maintenance costs

Generally the owner of real estate property must expect costs for maintenance and operation (e.g. heating, electricity) of 1% a year of the investment costs or market value. These costs can be higher in the case of older real estate properties.

Building areas

The types of building areas in standard use in Switzerland are defined in SIA standard 416/2003. The individual areas break down as follows:

        Floor area FA
less    construction area CA

=       net floor area NFA

less    circulation area CirA
less    functional area FunA

=       effective area EA

Building zone

Building zones are areas which can be developed in accordance with local authority building and zoning regulations. They are defined in the zoning plan. A building zone is subject to various restrictions on use, e.g. core zone, residential zone, industrial and commercial zone etc. Outside defined building zones, only agricultural and location-related structures are allowed in Switzerland.

Capital market

Market for medium and long term investment – generally over 12 months. By contrast, the money market is the market for short term funds.

Circulation area CA

(Source: SIA standard 416/2003). The circulation area CA is that part of the net floor area NFA used solely for access. The circulation area CA includes e.g. in the case of housing the areas outside the housing: Corridors, entrance halls, stairways, ramps, elevator shafts etc.

Condominium

(Source: www.notariate.zh.ch): Each condominium has the right to exclusive use and interior finishing of certain parts of the building. The principal goal of the condominium owner is freedom to use, design, sell and encumber the condominium. To secure these rights, it requires comprehensive regulation of the rights and duties of each condominium owner and organization of the condominium owners association.

Consolidation

(Source: www.notariate.zh.ch): Each condominium has the right to exclusive use and interior finishing of certain parts of the building. The principal goal of the condominium owner is freedom to use, design, sell and encumber the condominium. To secure these rights, it requires comprehensive regulation of the rights and duties of each condominium owner and organization of the condominium owners association.

Construction area CA

(Source: SIA standard 416/2003). The construction area is the floor area of the construction areas lying within and enclosing the floor area FA. Exterior and interior walls, supports, parapets, open cross sections of shafts and chimneys and door and window bays under 0.25 m2. Elements such as movable dividing walls and room dividers are not surrounding or interior construction elements in the sense of this standard.

Conventional mortgage

Notarized contract entered in the land register which creates a mortgage lien. The conventional mortgage is only evidential and does not have the nature of a security. The conventional mortgage can be structured as a capital mortgage or maximum sun mortgage. In practise there are also bearer mortgage-backed bonds.

Co-ownership

If several people own a property together, this is called co-ownership. There are two types of co-ownership: joint property and co-ownership. Condominium ownership Is a special form of co-ownership.

Direct amortization

With direct amortization the mortgage is effectively reduced by the agreed amortization instalments. The amount and frequency of the amortization payments are agreed in advance, based on the financial situation of the borrower (among other considerations). Each repayment reduces the outstanding mortgage amount, and accordingly also reduces the interest total. See also indirect amortization.

Early withdrawal of retirement capital

If retirement capital is withdrawn early to finance owner-occupied housing, the retirement benefits are reduced accordingly. In contrast to pledging retirement capital this creates a tax liability. The tax office responsible for the place of residence will provide information on request on the amount of tax due  Early withdrawal of pension fund capital is entered in the land register.

Easements reducing value

There are easements which can permanently reduce the value of a real estate property. Such easements include e.g. construction bans, usufruct, rights of habitation etc. Such easements reducing value do not include rights of access and rights of way or construction rights for water, sewerage, gas or other utility lines. Easements are based on a notarized easements contract for entry in the land register.

Effective area EA

(Source: SIA standard 416/2003). The effective area EA is that part of the net floor area NFA which serves the purpose and use of the building in the broader sense.

Equity

Generally, financing of owner-occupied properties requires the borrower to contribute 20% of the investment costs or market value in the form of equity, e.g. savings, inheritance etc. Part of this can also be financed by early withdrawal of retirement capital. Sweat equity can also be included, to a limited extent and subject to certain conditions.

Family home

A home owned and occupied by the family has special protection under the law. Legal acts that limit rights in family residential premises generally need approval by the other spouse. This specifically applies to terminating leases, selling or also encumbering the family home. Similarly, in a civil partnership one partner must approve legal acts undertaken by the other partner relating to the shared home.

Financing with retirement capital

Funds from an occupational pension plan and linked private plans can be used to finance owner-occupied housing (principal residence) whether by pledging retirement capital or by early withdrawal of retirement capital.

The amount available from the occupational pension plan for building housing is shown in the pension fund statement or can be ascertained from the pension fund.

First mortgage

Also senior mortgage. Mortgage loans with a loan-to-value ratio of up to the limit set by the banks of around two-thirds of the investment costs or market value. See also second mortgage.

Floor area FA

(Source: SIA standard 416/2003). The floor area FA is the area enclosed on all sides and covered of the accessible floors, including the construction areas. Floor area does not include space below the lowest accessible floor, inaccessible hollow areas in constructions, and insulation and roof areas with less than 1.00 m average height. The floor area FA breaks down into net floor area NFA  and construction area CA.

Functional area FA

(Source: SIA standard 416/2003). The functional area FA is part of net floor area NFA which is available for equipment and appliances. The functional area includes areas such as rooms for building equipment and appliances, motor rooms for elevators, supply and utility shafts larger than 0.25 m2, installation areas, supply and utility ducts, tank rooms etc.

Guarantee

Commitment by the guarantor to the lender to the primary borrower to repay the (principal) debt in the event of default. The purpose of the guarantee is to secure the principal debt.

Imputed rate of interest 

The mortgage lender uses the imputed rate of interest to calculate affordability. This rate represents a long term average to ensure financing even in a high interest rate period. Actual mortgage rates can differ from the imputed rate.

Indirect amortization

In the case of indirect amortization, the mortgage borrower does not make any direct repayments on the mortgage principal. Instead, the mortgage borrower saves the agreed amount on a retirement pension account which is pledged to the bank as security for the mortgage. This increases the retirement capital, while the mortgage debt remains unchanged. Indirect amortization allows the mortgage borrower to accumulate retirement capital while also benefiting from tax concessions on retirement capital saving. See also direct amortization.

Investment costs

Investment costs are either a) the costs of erecting a new building, such as land, construction, adjoining area and ancillary costs (e.g. fees, building loan interest) or b) the purchase price of an existing and turnkey property.

Value adding investments are also counted as investment costs. Among other purposes, investment costs are used to calculate real estate capital gains tax.

Joint ownership

(Source: www.notariate.zh.ch): In joint ownership, each joint owner is entitled to a part of the property which is not externally divided. Each joint owner is entered in the land register showing the share and can dispose of this. In contrast to communal ownership the emphasis is on ownership of the jointly held asset. Changes in joint ownership shares legally constitute a transfer of real estate title. The associated agreement accordingly requires notarization and only takes effect on entry in the land register. A change in joint ownership chares also generally involves fees and land taxes.

Joint property

(Source: www.notariate.zh.ch): Undivided ownership of a property by a community of persons based on legislation or a contract. They can only dispose of the property jointly. The rights and obligations of the individual joint owners arise primarily out of the joint ownership. The joint owners are primarily members of an association or community of heirs. This membership is associated with the position of joint ownership. The members of the following associations or communities are joint owners of the jointly held asset. Community property in marriage, joint property[1], community of heirs, simple partnership, collective partnership and limited partnership.

 

[1] An asset can be associated with a family by the relatives having a continuing inheritance in whole or in part of a joint asset, or by joint ownership of an asset (§ 336 ZGB). The contract forming joint ownership requires public announcement for validity and the signature of all the joint owners or their representatives (§ 337 ZGB).

Land register

Public register in which all rights to real estate properties are entered along with notations, comprising the main register, chronological register, building lot plans and property descriptions.

Land register extract

The plat is an official document showing the boundary of real estate properties with the corresponding markings and buildings and permanent structures. Generally plats are drawn up by the responsible surveyor on a scale of 1:500. In several cantons, these plats can be obtained online. In contrast to a surveyor’s certified copy, an electronic plan is not legally binding. A plat generally contains the following details: Boundary, markings, road names, buildings and permanent structures, major retaining walls and the like, land register or property numbers, building numbers, house numbers, building lines.

Land register plat

The plat is an official document showing the boundary of real estate properties with the corresponding markings and buildings and permanent structures. Generally plats are drawn up by the responsible surveyor on a scale of 1:500. In several cantons, these plats can be obtained online. In contrast to a surveyor’s certified copy, an electronic plan is not legally binding. A plat generally contains the following details: Boundary, markings, road names, buildings and permanent structures, major retaining walls and the like, land register or property numbers, building numbers, house numbers, building lines.

Libor

Abbreviation for London Interbank Offered Rate. Libor is an important reference rate for many financial market transactions. It is set daily at 11 a.m. London time. For this, 20 internationally active major banks report the interest rate at which they lend to other banks. The four highest and lowest rates are deleted and the average is calculated of the remaining 12 rates. The resulting figure is the Libor rate applying on this day, which is published in the most important financial media. The Libor rate is only available for the ten most important currencies: CHF, USD, EUR, GBP, JPY, AUD, CAD, NZD, DKK and SEK.

Loan-to-value ratio

The loan-to-value ratio is the ratio between the amount of the mortgage and the investment costs or market value of a property. The ratio is expressed as a percentage. Owner-occupied residential properties (principal residence) generally  have a loan-to-value ratio of up to 80% of the investment costs or market value, i.e. for a property with a value of CHF 500,000 the purchaser can get a mortgage of CHF 400,000 and must contribute equity of CHF 100,000.

Location quality

Location quality is an objective and subjective assessment of the location of the real estate property. High location quality has a positive effect on the market value or price of a real estate property. Factors affecting location quality are  sound emission, view, sunlight, transport links etc.

Market value

The price which can be obtained from the sale of a property under ordinary circumstances. The market value is determined by an expert appraiser based on the intrinsic or investment value. Age, location quality and the state of the property all play an important role in this. Easements reducing the value such as e.g. right of habitation also affect the value of a real estate property.

Money market

Market for lending or borrowing short-term funds – generally, up to 12 months. By contrast, the capital market is the market for medium- and long-term funds. Mortgages based on the money market are generally tied to Libor.

Mortgage

A loan secured by a conveyance of title to real estate. In Switzerland, variants are the mortgage-backed bond and the mortgage note

Mortgage note

A mortgage note is vested by a personal claim and secured by a mortgage on real estate property. Together with the conventional mortgage the mortgage note is the second type of mortgage allowed by statute. It is structured as a paper note or register note. The paper note is a security. The register note is a register lien.

Net floor area NFA

(Source: SIA standard 416/2003). The net floor area NFA is that part of the floor area FA between the surrounding or interior construction elements. The net floor area NFA breaks down into: effective area EA, circulation area CirA and functional area FunA

Pledging of retirement capital

If retirement capital is pledged as additional security for financing owner-occupied housing, the retirement benefits are unaffected in contrast to early withdrawal of retirement capital, but are now pledged in favour of the mortgage lender. The pledge has no tax effect for the retiree.

Plot area

(Source: SIA standard 416/2003). The plot area can comprise a single plot, several plots and parts of one or more plots. The plot area comprises the building footprint BFP and adjoining area AA.

Purchase contract

(Source: www.notariate.zh.ch): The purchase contract for a real estate property must be notarized. In addition to entering into the notarized purchase contract, acquisition of title requires entry in the land register.

Purchase price

Price actually paid for a real estate property. Generally, this does not include transaction costs such as taxes or fees. These must be paid separately.

Real estate capital gains tax

Cantons typically levy a real estate capital gains tax on the profit on a sale of a property (sale price less investment costs). This is paid by the seller. The owner should always retain construction invoices, purchase contracts and invoices for investments adding value. The Federal Government only taxes real estate capital gains if they are commercially made. Contact the tax office for the local authority responsible for the residence for details. See also real estate transfer tax.

Real estate property

(Source: www.notariate.zh.ch): Real estate properties within the meaning of the Civil Code are properties independent and continuing rights entered in the land registry, mining rights and joint rights in real estate properties.

Real estate transfer tax

(Source: www.estv.admin.ch): Real estate transfer tax is a tax on the transfer of a right in rem in real estate from one person to another. This is accordingly a levy on a real estate transaction. Real estate transfer taxes in Switzerland are levied by the cantons and/or local authorities and not the Federal Government, with the exception of the cantons of Zurich and Schwyz, which do not levy such a tax. Contact the tax office for the local authority responsible for the residence for details. See also real estate capital gains tax.

Right of first refusal

(Source: www.notariate.zh.ch): The holder of a right of first refusal has the right to transfer of title in a real estate property by unilateral declaration of intent. Unless some other agreement is reached, the right of first refusal can be exercised if the real estate property is sold and with any other transaction which is commercially equivalent to sale. These transactions do not include, e.g. gift, assignment to an heir in the division of inheritance or purchase by eminent domain.

Grant of a right of first refusal is based on a preemption contract. This requires notarization to be valid. However, if the sale price is not set in advance, a simple written contract is valid. A notary public can be consulted for assistance in drawing up a preemption contract. The maximum term allowed for a preemption agreement is 25 years. Contractual right of first refusal must be entered in the land register to be legally valid with regard to third parties.

Right of habitation

A right of habitation is an easement which entitles the holder to reside in a house, apartment or part of an apartment. A right of habitation is personal and can only be exercised by the holder. It cannot be left by way of inheritance or otherwise transferred. Premises encumbered by rights of habitation cannot be let. The holder of the right of habitation has the right to have family members and household members (e.g. a servant) live with them. The holder of the right of habitation declares the rental value of the premises encumbered by the right of habitation, assumes the prorated costs of electricity, water and telephone and pays the other public and private charges (street sweeping and sewerage fees, radio and TV license fees etc). The owner must pay extraordinary repairs and expenses, mortgage interest, insurance premiums, taxes and levies. A right of habitation is mostly granted for life. Parents often transfer a real estate property to their children and retain a lifelong right of habitation or right to use the whole or part of the property. A right of habitation in a property must be notarized and is entered in the land register as an easement.

Second mortgage

Also junior mortgage. Mortgage loans which are normally granted with a loan-to9-value ratio of between 65% and 80% of the investment costs or market value. The second mortgage bears a higher interest rate than the first mortgage and must generally be amortized. See also first mortgage and loan-to-value ratio.

SIA standard

(Source: www.sia.ch): The Schweizerische Ingenieur- und Architektenverein (Swiss Association of Architects and Engineers, SIA) is responsible for Swiss standards for construction. The standards are recognized in the construction industry. SIA standards provide professional guidance to members and all those involved in construction. The principal tasks of the committees are to maintain existing standards, integrate European standards and further develop standards as reasonable and appropriate.

Standard of finish

The standard of finish is primarily determined by the materials used (e.g. marble) and the fixtures and fittings in the property. Examples are a fireplace, Swedish stove, electric shutters, additional bathrooms, number of fitted closets, etc. The standard of finish affects the price/value of a property.

State of the property

The state of a building is important for determining the market value and for assessing the ancillary and maintenance costs. If a building is obviously in poor condition the mortgage lender can assess the financial risk as high even though the purchase price is low. The subsequent costs of renovations could pose a risk to the borrower’s affordability. An interested purchaser should not be impressed by photos and should inspect the property in person. In case of date the prospective purchaser should engage an appraiser.

Statutory charges over property

(Source: www.notariate.zh.ch): Statutory charges over property are those which can arise against the intent of the property owner. The legislature has created specific claims closely associated with the property which are privileged to the extent that either the statutory charge “automatically” exists for the associated claim (direct statutory charge) or the creditors have a statutory right to establish a charge (indirect statutory charge).

Statutory charges over property are always Conventional mortage. The holder of statutory charges cannot waive these in advance. This is particularly important for a contractor’s lien. Examples of statutory charges: vendor’s claims in the property sold, claims of joint heirs and communities from division of the community properties, claims of contractors, claims of condominium owners to contributions, mortgage interest claims of property owners, insurance premiums of the building insurance company, claims under construction measures taken in the interests of the fire inspectors, claims from flood protection measures and concessions for local authority land tax claims.

Sweat equity

Sweat equity is construction and conversion work by the property owner. Sweat equity can be part of equity. Sweat equity is normally not counted as equity to the full extent. The owner must also warrant that the work can be carried out professionally, that the estimated prices are in line with market rates, and that the liquidity of the party performing the work will not be excessively strained.

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