Buying real estate
The basis for taking the right decisions: good advice
When it comes to financing a home, there are many points to watch out for. That’s why it’s vital to get advice on the key issues.
by Jürg Zulliger
06 Apr 2017
Owning your own home, whether a condominium or a house, is generally a long-term investment. That makes it all the more important to put real estate ownership on a solid foundation right from the start. There’s a lot to bear in mind when planning your financing, mortgage, and retirement. For example: How much will it cost in total over the entire period of ownership? What sort of precautions should you take to keep your budget stable over the long term? How can you make sure that you can enjoy life without financial worries?
Defining a strategy tailored to your needs as an individual – in terms of mortgage maturities and the product mix – is an essential starting point. A superficial, quick check or online agreement doesn’t take these aspects into account. Below we use four practical examples to illustrate how solutions were successfully found during personal consultations to resolve different issues, some of which were quite unusual.
Case 1: Can we afford the costs over the long term?
It was almost love at first sight: No sooner had newlyweds Monica and David M. (names changed) seen the advert for the newly constructed “Obstgarten” building, than they reserved an attic apartment for one million francs. The young couple made some calculations using the current very low interest rates, and came up with a rough estimate: with interest rates of perhaps 1.2 or 1.5 percent, the mortgage they needed would only cost them between 10,000 and 12,000 francs a year.
Although Monica and David M. had heard about the restrictions and minimum conditions applicable to mortgages, they didn’t realize that they needed to use an assumed interest rate of 5 percent for their budget – even if mortgages currently cost a lot less. The assumed costs of a new apartment with interest, amortization and running costs may not exceed one third of disposable gross income. In our example, the interest alone on the 800,000-franc mortgage (using an 80 percent loan-to-value ratio on the purchase price of one million francs) with an assumed interest rate of 5 percent, amounts to 40,000 francs a year.
Build up your equity
When calculating affordability, in principle you can include all the documented, ongoing income you expect to earn – including any bonus payments, upcoming salary increases, etc. – if you can provide appropriate proof. For couples, you can improve the assessment if in addition to the main earner, the other partner also has a regular second income. In this case, both partners must agree to be jointly and severally liable for the debt – otherwise, the second income cannot be included.
If initial checks show that the real estate is only just affordable, or too expensive, you should consider putting in more equity. If the couple in our example requested only a 60 or 70 percent loan-to-value amount from the bank, the overall costs would fall. The main sources of equity are savings, securities, or pillar 2 and pillar 3 assets. In practice, potential buyers also investigate the possibility of an advance on an inheritance, or a gift from a relative.
Case 2: How to finance home ownership after retirement
Nina and Mark F. are in their 60s. They need to face the fact that the switch from working to retirement often means a fall in income of 20 to 30 percent. There may be even bigger gaps if pension fund assets were used to buy the home and these were not paid back in full. That’s why it’s so important to address the subject of retirement planning early on. The ideal time is generally between ages 50 and 55. If a calculation of future pension benefits shows it will no longer be possible to afford your own home later in life, there’s still time to make appropriate arrangements.
Constantly reduce your debt
According to the applicable minimum standards, every mortgage debt must be reduced to two-thirds of the loan-to-value ratio of the real estate within 15 years. If there isn’t sufficient time to reduce enough debt before retirement, higher amortization may be necessary. Two things should be decided during a personal consultation: Firstly, how these additional funds can be saved, for instance using an account, financial investment, or pillar 3a. Secondly, whether the money should reduce the mortgage directly (direct amortization) or indirectly via pillar 3a. With indirect amortization, you save up capital in pillar 3a in order to reduce your mortgage debt later on. This lets you save on taxes at the same time, because payments into pillar 3a can be deducted from taxable income.
Case 3: Can we finance two homes temporarily?
Martin and Eve F. want to move in together. They both own condominiums, each with their own mortgage. The couple don’t want to be forced to sell their apartments under time pressure. It’s a difficult situation. The client advisor must explain the liabilities they’ll both incur as a result of this extra financial burden, and also clarify what Martin and Eve F. intend to do with their real estate. Affordability and equity requirements must be met for the overall financing. Cases of double or even triple financing of this kind often fail standard credit checks.
Use additional resources to the full
During a personal consultation, the first thing your advisor will look at is the time periods involved. If it’s a matter of just two or three months, it’s usually possible to bridge the gap. In the case of Martin and Eve F., the client advisor asks additional questions, such as: “Will the apartments be rented out?” In cases of multiple financing, rental income from at least one property offers significant relief. If the plan is to sell one or both of the existing apartments, this also gives more scope for bridging the gap. On the one hand, it’s clear that the multiple burden will end soon. And on the other, binding promises of payment from potential purchasers can be used to secure mortgage financing. The client advisor will also examine other collateral options. In the case of Martin and Eve F., one possibility would be for their parents to offer their own assets as additional security for the financing
Case 4: Divorce or death – what next?
In principle, it’s best to make sure that the most important financial issues are clear before buying a home. For example: Will the partners have equal shares in the real estate? How much equity is contributed by each person? Are they both jointly liable for the mortgage? It’s important to always look ahead: What would happen if you were to split up? Who would have a claim on the real estate? Who should be promised the right to continue to use the joint home?
Clarify the situation early on
A marriage or inheritance contract may make sense as a way to settle real estate rights. This type of document generally needs to be drawn up by a notary. If you want to protect your family, you should also think about insurance. Protection of this kind is advisable too when a family is heavily dependent on the income of one partner. In this case, a life insurance policy is often taken out. The insured benefits should be set at a level that means any remaining mortgage debt is affordable for the surviving family.
Conclusion: careful planning lets you relax and look forward to the future
Anyone wanting to buy or build a home should abide by the “golden rules” of financing. Decisions must also be made with the long-term consequences in mind. It is important to consider all the relevant aspects, and avoid mistakes wherever possible. We’ll help you every step of the way. We’ll take the time to ask about and understand your plans for the future. What’s more, we are experts on a wide range of specialist topics: investment and purchasing decisions, asset and tax planning, inheritance and gifts, retirement planning, pension planning, and protecting your loved ones. With good advice, you can be certain of taking the right decisions and finding a customized solution for your situation.