The acquisition of real estate is one of the biggest financial decisions you will make in life. That’s why it’s all the more important to be aware of desires and expectations, but also of possibilities. To help you make this important decision, we explain what you need to bear in mind when financing a property.
Talk about money in your relationship
As shown by the UBS Investor Watch Report, while women consider long-term finances to be very important, many of them fail to address the subject. The UBS study also revealed that women who make long-term financial decisions with their partner not only increase their chances of financial security, but also have a more positive attitude towards the future. So get actively involved in the topic of finance and talk openly with your partner about financial matters such as financing, mortgages, interest and equity. By drawing up a household budget, you can determine together how much of your own funds will be put aside each month to be able to raise sufficient equity to finance your own home.
Think about finances at an early stage
Whether married or not – a couple should start thinking early on about how to finance a house or apartment. This is because the purchase of residential property, whether as an investment or for personal use, entails long-term obligations to the bank as well as ongoing costs. Events such as a separation can put a couple with shared property in financial difficulty. Who should keep the home? And who will continue to contribute to the costs of the mortgage of the house and its maintenance? From a legal point of view, the entry in the land register is decisive in such cases. So if the necessary documents are missing, it may be difficult to prove afterwards how much equity was contributed by each party.
Draw up a contract on key issues
Even if nobody hopes for this to happen – you should protect yourself against the possible consequences and clarify important issues with your partner at an early stage. One possibility is to conclude a marriage or cohabitation contract. In this type of contract, individual provisions can be set out regarding income and assets. This procedure is not mandatory, but allows a couple to choose between separation of property or community of property. In addition, binding regulations for succession planning or inheritance can also be put down in writing. Since a “physical” property cannot simply be divided into parts, a clearly documented arrangement for its transmission is important and prevents conflicts between the various beneficiaries.
Decide on the form of ownership
If you buy a house or an apartment together as a couple, you must decide on the form of ownership. According to Swiss law, there are three ways to acquire property:
- Sole ownership: only one party contributes equity and is entered in the land register as the sole owner. As such, they can freely dispose of the residential property, but also bear sole responsibility. If the property is the couple’s shared house or apartment, the home may not be sold without the consent of the partner.
- Joint ownership: several parties contribute equity and the property belongs to all parties equally – regardless of how much equity each person has contributed. The owners can only dispose of the property jointly and it is not possible to sell individual shares.
- Co-ownership: both partners contribute equity and are entered in the land register with their respective ownership quota. Each party is free to dispose of their share, but also bears the obligations for it. If one co-owner wishes to sell their share, the law grants the other co-owner(s) a right of first refusal.
The choice of the form of ownership depends on your financial possibilities, but also on your relationship with your partner. Most couples opt for co-ownership because it offers less potential for conflict, for example if the partnership is dissolved.
Actively address the issue of mortgages
In order to be able to afford a house or an apartment of their own when interest rates are low, many couples have no other choice than to finance home ownership together and be jointly and severally liable to the bank for the mortgage. For double earners in particular, this provides more scope for financing and makes it easier to meet the bank’s requirements regarding equity and income in order to be able to bear the interest payments. From the bank’s point of view, it’s irrelevant which partner brings in more equity capital for the financing when it comes to arranging the mortgage.
As soon as you obtain a mortgage, there are ongoing costs for interest and amortization. The capital borrowed from the bank is usually divided into a first mortgage and a second mortgage to finance 66% and 14% of the borrowed capital requirement respectively, with 20% having to be contributed as equity. The second mortgage must be repaid within 15 years or at the latest by retirement.
Keep an eye on affordability – even after you retire
Affordability is a key factor when obtaining a mortgage. It provides information on the relationship between the household income of the potential buyer and the ongoing costs of a house and its financing. When you retire and your income falls sharply, the framework conditions for the mortgage’s affordability requirements change. With regard to the maximum level of affordability, the rule of thumb that is often quoted is that the ongoing costs must not exceed one third of the household income of the buyer. In practice, however, there is room for maneuver and this value is by no means set in stone. One way to ensure affordability is, for example, partial amortization of the mortgage. Early planning makes sense in any case. Find out whether you can afford your dream property – with the UBS mortgage calculator.
Don’t forget the maintenance costs
In addition to the amortization and interest to be paid to the bank, the costs of maintaining your home should not be forgotten. Maintenance costs are the expenses for the upkeep of the property. These include charges for water, wastewater and refuse, insurance, property taxes depending on the canton, but also costs for hot water and energy, ongoing building maintenance, minor repairs and environmental maintenance. A total of between 0.7% and 1% of the purchase price should be reserved for incidental costs and maintenance of the property.
If a property is already somewhat older or in poor condition, these costs may well be higher. It is therefore advisable to establish annual reserves. This financial cushion helps to avoid having to increase the mortgage when major maintenance work is due. Our tip: in addition to the account from which the interest for the mortgage is debited, open another account for maintenance costs and make regular payments into it.
Provide for unforeseeable events
Life is sometimes unpredictable and can result in unexpected financial shortages. In the event of a separation or divorce, disability or even the death of a partner, the dream of owning your own home can quickly come to an end. We will be happy to explain options for ensuring financial security. If a couple gets divorced, the assets are divided according to the chosen matrimonial property regime, unless otherwise agreed in the marriage contract. Unmarried couples should conclude a concubinage contract.
There is no magic formula for financing a property. So every couple should try and find a solution that is tailored to their individual needs. Our experts will be happy to advise you on this.