Do you have a clear idea about your dream property or have you perhaps already found it? Before you make concrete plans for your new home, you’ll need to sort out the financing.
Real estate is usually financed from a combination of your own savings and borrowed capital (bank mortgages). There are two important prerequisites for a bank loan:
- The ratio between your borrowed capital and your own capital is usually 80:20. Since 2012, you must contribute 10 percent of “genuine” equity, for example, savings, inheritances, gifts, surrender values of insurance policies, proceeds from the sale of securities or capital from private retirement savings (pillar 3a). You can also use capital from your occupational pension fund (pillar 2).
- Generally speaking, a mortgage is financially viable if the total cost of home ownership is no more than one third of gross income.
Every client’s situation is unique. That’s why it’s important you contact your UBS advisor as early as possible. With their expertise and experience, they will be able to help you with all your financing questions.
The most frequent questions that arise
What is the maximum I can afford to pay for a home?
This will depend on two factors: income and disposable wealth. The maximum loan also depends on the market or capital value as determined by the bank. This is not necessarily the same as the investment cost of a construction project or the asking price. Any difference must be financed by you, but the money used cannot come from early withdrawals from pillar 2 or by pledging pension fund assets.
I’ve found my dream house – what do I do next?
When financing your own home, complex questions arise, and the need for advice is great. Therefore, contact your client advisor as early as possible. Based on your situation, he or she will put forward solutions, for example regarding your savings, personal financial and retirement planning, the formal purchase process and the purchase or construction contract.
In today’s market, it’s often difficult to calculate the market or capital value of the property in question, but your client advisor has some useful tools for this purpose and can provide you with a valuation. In the case of older properties, the amount of refurbishment required is often underestimated. Your client advisor can produce a cost estimate for you using a refurbishment calculator.
What does the choice of mortgage, the mix of mortgage periods and the financing strategy depend on?
Finance planning is tailored to the client – to you and your life situation. Your real estate strategy is also very important: do you want to live in the property yourself, sell it or gift it? A long-term strategy or solution that gives you more flexibility may make sense.
Your individual mortgage profile depends chiefly on your financial situation and risk appetite. If a fixed budget and security are important to you, your mortgage profile will be completely different from that of someone who takes a keen interest in interest rate developments and has financial reserves.
The greater your need for predictability and security, the more appropriate a fixed-rate mortgage is likely to be. Fixed-rate mortgages can run from two to ten years. The advantage is that the interest rate won’t change over this period so you won’t need to worry when interest rates rise.
What’s the difference between fixed-rate and SARON mortgages?
SARON stands for “Swiss Average Rate Overnight” and is a reference interest rate published daily. The reference interest rate “Compounded SARON” is used to determine the interest rate to be paid. The interest is calculated at three-monthly intervals and unlike a fixed-rate mortgage, the interest rate is variable. SARON mortgages can be taken out at any time and for an unlimited term. The current low interest rate environment makes these money market mortgages (formerly referred to as Libor) particularly attractive. Another advantage is the greater flexibility compared to fixed-rate mortgages with a fixed term.
You can switch UBS SARON mortgages to a fixed-rate mortgage if necessary: switching only takes a couple of working days. With the UBS SARON Flex Mortgage, you also have the option of making an extraordinary repayment once per calendar quarter, free of charge.
How can I ensure my family is financially secure in future? What do clients with children need to know?
Buying a property is a long-term decision, so it’s really important to put your finances on a solid foundation. Providing for the future means thinking about risks such as sickness, disability or death. For example, if your household income depends mainly on employment income, you’ll need to insure yourself against disability or death.
Whereas employees are not usually covered against an inability to work due to sickness, they are usually well insured in the event of an accident. To close this gap, death benefit insurance is advisable. In a worst-case scenario, the insurance policy would make a capital payment, enabling your second mortgage to be repaid. This reduces your financial burden and surviving members of your family will be able to continue living in the same home.
When it comes to individual advice and financial security, pension fund benefits are also significant. If you are planning an advance withdrawal of capital from your pension fund to purchase residential property, you should clarify your pension situation and close any gaps.
How much of my mortgage do I need to pay off and when do I start?
Amortizations, i.e., the repayment of mortgage loans in installments, are mandatory in Switzerland. A mortgage must be reduced to two thirds of the market value determined by the bank within 15 years – you’ll have to repay a contractually agreed amount annually or quarterly. Repayments cannot be deferred and, in the case of direct repayments, they must start no later than at the end of the quarter 12 months after the loan was provided.
For tax reasons, indirect repayments are often preferable, whereby you the homeowner pay the agreed amounts into pillar 3. Your payments and the retirement account both qualify for tax relief. The monies are pledged to the bank and are then available to make repayments.
Save on taxes by owning your own home
If you own a property that you also live in, the imputed rental value of the property is taxed as if it were income. However, mortgage interest, repayments via pillar 3a and maintenance and ancillary costs are all tax-deductible. Refurbishments, especially for energy-saving purposes, should also be planned with an eye on taxes – many of these expenses are tax-deductible.
Whether you save on taxes or not by purchasing your own home will vary from individual to individual, so it’s important to get advice and understand the tax implications of the individual steps.