Purchasing real estate Buying a house: what unmarried couples should know

There are many questions to answer when buying residential property. The most important points should be set out in a contract

by Jürg Zulliger 15 Sep 2021
Image: UBS

There is one area where it makes no difference whether a couple has a marriage certificate or not: financing. If both partners take out a mortgage together, both are usually jointly liable for the mortgage debt – both partners become contracting parties with regard to the bank. This applies to married couples, cohabiting couples and couples in a registered partnership.

Like all other borrowers, couples must contribute at least 20 percent of the property value from their own equity to finance residential property. A proportion of at least ten percent must be obtained from funds that do not originate from their occupational pension plan. The couple’s economic capacity is verified to ensure the affordability of the mortgage. The total gross income available must meet the affordability rules. This means that the costs calculated for their home – taking into account an imputed interest rate of five percent – including amortization and around one percent of the property value for maintenance and ancillary costs, may not exceed one third of gross income. All regular and documented income of the couple can be considered.

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Sole ownership, co-ownership or joint ownership?

The law provides for three ownership options. Sole ownership is when one person finances and purchases the property alone. This means that they can freely dispose of the property. Sole ownership can make sense if, for example, one partner already owns the property. If the other partner has no rights to the jointly occupied property, strictly speaking the conditions of use would have to be defined in detail and, for example, a rental agreement would have to be drawn up.

In most cases, couples opt for co-ownership. This means that each person may freely dispose of the proportion they own. They are both listed in the land register according to their share in the property. Very often, the ownership ratio is 50:50 – although any other ratio can be envisaged. However, it should always correspond to the amount that each person contributed to the purchase of the property. Co-ownership is chosen in particular if one of the two buyers would like to put pension assets from the 2nd or 3rd pillar toward the acquisition.

In the case of joint ownership, both parties are entered in the land register with equal rights. The property belongs to them equally – even if one person has invested more equity than the other. Joint ownership means that the partners are closely bound to each other and can, for example, only decide to sell their residential property if they both agree.  

Evening out financial differences

In all three ownership models, couples need to be aware that different levels of equity can have an impact: When granting the mortgage, the bank either accepts sole debtor liability or requires joint and several debtor liability – regardless of the actual ownership relationship. This could lead to discussion if, for example, one partner contributes 20 percent of the funds but is liable for 50 percent of the debt. Additional measures such as a cohabitation agreement are needed to determine how to proceed in such cases. 

Cohabitation: specify the details in a cohabitation agreement ...

Both in terms of social insurance and inheritance law, couples in registered partnerships are on an equal footing with couples who have a marriage certificate. Many rights and obligations are regulated by law.

The situation is different for cohabiting couples: There are no set rules, or only insufficient rules, to govern essential issues such as future separation or the death of a partner. It is therefore advisable to conclude a cohabitation agreement before acquiring residential property. This should include, but not be limited to, the following:

  • Property: precise description of the division of property, i.e., form of ownership, ownership shares and voting rights of both partners, origin of the contributed capital.
  • Costs: proportional breakdown of ongoing costs such as interest, ancillary costs, maintenance, renovations, etc. in equal shares or according to income.
  • Separation: procedure and division of property, i.e., who can take over or continue to occupy the residential property and under what conditions?

Since the cohabiting partner is not a legal heir, a will should be drawn up in addition to the cohabitation agreement, taking into account any compulsory shares of the estate due to legal heirs (parents, children). Arrangements between heirs are best recorded in an inheritance contract.

... knowing and hedging risks

By law, couples in a registered partnership are just as well protected as married couples. Cohabiting couples, on the other hand, should play out scenarios involving unforeseen events. What if a partner becomes incapacitated? Incapacity to work following an accident is well covered under accident insurance, while incapacity to work as a result of illness is statistically more common, but is usually less well insured. It is therefore advisable to identify gaps in pension provision and close them, for example, with an invalidity pension.

Cohabiting couples should also cover each other with a death risk insurance policy. If one partner dies, a sufficient amount would then be paid out to the other partner, for example to significantly reduce the mortgage. The sum insured should be high enough to allow the partner to continue to financially support the costs of the residential property.

The benefits paid out by pension funds (occupational pension plan) for cohabiting couples depend on the provisions in the regulations of each specific pension fund. As part of a pension analysis, you should therefore ask your pension fund whether and under what conditions benefits would be granted.

You should seek professional advice on how to close any gaps in your pension provision in the event of an accident, disability or death.

Protecting your partner

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Advantages of pillar 3

When it comes to restricted private pension provision (pillar 3a), the surviving spouse or the surviving registered partner is the first beneficiary. The rule for cohabiting partners is that if there is no surviving spouse or registered partner, the partner will be a beneficiary along with the direct descendants and any other heirs, provided that the cohabitation was uninterrupted for the last five years prior to death. In the case of death risk insurance (pillar 3b, unrestricted pension plan), the beneficiary can be freely chosen. With both the 2nd and 3rd pillar, it is important to notify the pension fund in writing of any change in the beneficiary.

Here too, it is crucial for couples to seek advice, to obtain as much information as possible and to take appropriate measures to ensure that they are well covered for all eventualities.

Checklist

Pension planning analysis: According to the law, unlike married couples and couples in a registered partnership, cohabiting couples often do not benefit from accident insurance, AHV and pension funds, or benefit only under certain conditions. What measures make sense as a precaution in case of death? Obtain professional advice.

Property: Consider which of the three forms of ownership suits you best. In the case of co-ownership, define who holds what proportion of the property.

Ownership share: The distribution of property depends on various factors: Who can contribute how much equity? Who will contribute how much to the running costs? What are the tax consequences considering that mortgage interest can be deducted from income?

Contract: A written contract is recommended, but not mandatory. It can prevent conflicts concerning cost contributions and ownership, and be useful in the event of separation. As a rule, this type of contract must be drawn up individually. Allow enough time for this.

Cost contributions: Keep records of investments in the property, contributions to maintenance costs etc., and document who contributes how much. Keep the receipts for an extended period of time. Lists of this kind can help at a later date if it is necessary to retrace who contributed to the joint property, or who financed investments and improvements, and to what extent. If nothing is documented, the proportions recorded in the land register apply.

“Marriage for all” legislative amendment 

Following the acceptance of the referendum on 26 September 2021, marriage will be possible for same-sex couples in future. The corresponding legislative amendment is expected to come into force in July 2022. From this date, no new registered partnerships will be established. Existing registered partnerships can either continue or be converted into marriage by means of a simple procedure.

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