Financing a second home Off to vacation paradise

Off to your own vacation home in the sun: Who doesn’t dream of that? Here are the essentials for purchasing.

by Stephan Lehmann-Maldonado 08 Jan 2016

Image: iStock

Sun, snow and skiing instead of a misty landscape with your own chalet in the mountains you can have a weekend getaway on the spur of the moment, even in the high season. And all your sports equipment, favorite books and bed are ready and waiting for you.

But beware: Vacation homes – so-called second homes – are subject to special financing principles. Tax issues also differ from owner-occupied homes.

The main rules for financing

  • Banks usually finance up to 60 percent of a vacation home’s property value – and not 80 percent as is the case with a primary residence. This means the buyer must provide more equity.
  • In the affordability calculation an annual imputed interest rate of 5 percent will apply to the financing amount, just as it does for an owner-occupied home. This is to ensure that financing has a solid foundation in the event interest rates were to soar. Then there is the annual amortization payments of 1% of the loan amount and an imputed 1% of the property value for maintenance and ancillary costs.
  • Funds from an occupational pension plan (pension fund) as well as funds from Pillar 3a that enjoy tax benefits may not be used for vacation homes. This option only applies to the main residence.
  • The vacation home is usually not located in the canton of residence. This means that you have to submit a tax return both at your place of residence and at the location of the vacation home. The Swiss Federal Tax Authorities add an estimated rental value to your income. This is taxable in the canton of the vacation home. If you rent out your vacation home, the rental income will be added instead of the imputed rental value. Mortgage interest and maintenance costs are deductible.

The magic formula: Which house can I afford?

Whether you can afford a vacation home or not can be determined by carrying out a basic income/expenditure calculation: The combined expenditures for your principal residence and the vacation home must not exceed more than one-third of your gross income.

It is important to know that the value of vacation properties in tourist regions may be subject to strong fluctuations. Prices are usually susceptible in popular destinations if the economy weakens significantly.

A purchase can rarely be justified on the grounds of expecting a return on investment alone. Any potential revenues barely cover the running costs (interest on equity and debt, taxes, fees). A study conducted by the University of St. Gallen determined that a 3.5-room apartment in an average Swiss tourist destination will cost approximately 24,000 francs per year. To bring in this amount an apartment would have to generate significant income throughout the year by renting it out or private use.

Avoid extravagant prestige properties

When purchasing your property, be sure that your vacation rental is relatively easy to market and attractive to tenants. You should also make sure that it will also be cared for professionally when you are not there. By doing so, you can create ideal conditions for ensuring your vacation home is good for your vacation budget as well.