A model house for the construction of a single-family dwelling. Affordability and loan-to-value ratio must be in order.

Anyone who wants to buy residential property and, like most buyers, needs a mortgage to do so, will encounter the central concepts of equity and affordability. They hold the key to what property you can afford.

What counts as equity or own funds?

In addition to obvious resources such as money held in savings and current accounts, securities and valuables – from paintings to jewelry to vintage cars – can be sold and thus also count as equity. So too does the surrender value of an insurance policy or unencumbered construction land. Equity for the purchase of a house can also be increased by an inheritance advance or gifts from a family member. Furthermore, in Switzerland, all of your pillar 3a retirement savings can be used to finance residential property and also count as equity.

How much will my mortgage cost?

Enter your own equity, the purchase price and household income into our mortgage calculator and you will see immediately whether you can afford your desired property.

All of the monies mentioned above count as “hard” equity. There is also “soft” equity, some of which can also be used to finance the purchase of a property. Here we are mainly referring to the advance withdrawal of retirement savings from pillar 2.

How much equity is required?

In Switzerland, as a rule 20 percent of the purchase price or market value must be financed by equity. A mortgage can be taken out for the remaining 80 percent. A distinction is made here between the first and second mortgage. Up to two-thirds of the purchase price can be covered by the first mortgage, which does not have to be amortized. The second mortgage, on the other hand, must be amortized within 15 years via regular repayments.

The following applies to equity: at least 10 percent of the financing must be provided by “hard” equity, the other 10 percent can be financed by an early withdrawal from your pension fund. Remember that with this model (“only” 10% hard equity) the mortgage will be 90% of the purchase price. The 10% “soft” equity cannot therefore be used to reduce the mortgage amount.

A personalized solution for your dream home

Every situation and every property is unique, which is why you need a solution that is tailored to your precise needs. Our advisors will be happy to explain your options.

Different rules for vacation homes and investment properties

If you want to buy a vacation home or a luxury property you will need a higher proportion of equity to obtain a loan, generally 40 percent. In addition, retirement savings from pillar 2 or pillar 3 accounts cannot be used as equity.

In the case of investment properties, other rules apply: Loans of up to 75 percent of the property value are possible, but the mortgage must be reduced to two-thirds of the property value within 10 years. Pension funds can be used if you inhabit part of the property yourself.

What affordability tells you

Before granting a mortgage, the bank also checks whether you can afford the property in the long term. To do this, it compares the cost of your home against your gross income. The basic rule is that your home’s running costs must not exceed a third of your gross income.

How is affordability calculated accurately?

What sounds simple at first glance is not quite so easy due to the current regulations: To calculate affordability, imputed interest is used, i.e., not actual interest, but assumed amounts. This is to ensure that a property is still affordable even if interest rates rise.

The mortgage costs are calculated at an imputed rate of 5 percent, which is the customary market rate. This value is significantly higher than the current market interest rate for mortgages in recent years. In addition, there is the agreed amortization for the second mortgage together with an imputed interest rate of 1 percent of the property value for maintenance and ancillary costs each year.

Security in every scenario

Since in the case of couples both incomes are used to calculate the affordability of a mortgage, it makes sense to make provisions in the event of the sudden loss of one of the incomes. Life insurance protects you against financial losses due to death or disability.

As mentioned, the sum of these costs must not exceed one third of gross income. This income includes the 13th month’s pay and other long-term salary components. If a couple buys a property and both are employed, the income may be combined, provided that they enter into a joint debtor relationship, i.e., joint and several liability for the debt.

As gross income usually falls after retirement – especially if, in a joint debtor relationship, both parties stop working – mortgage affordability must be recalculated in old age. Ideally you should consider your repayment commitments and living arrangements in old age at least 10 years before you retire.

Financing examples with equity and affordability

Since the calculation of the required minimum equity and minimum gross income entails some work, here is an overview for orientation, broken down according to different real estate values.

Value of the real estate

Value of the real estate

Minimum equity required

Minimum equity required

Annual imputed costs*

Annual imputed costs*

Required minimum gross income*

Required minimum gross income*

Value of the real estate

600,000

Minimum equity required

120,000

Annual imputed costs*

35,333

Required minimum gross income*

106,000

Value of the real estate

800,000

Minimum equity required

160,000

Annual imputed costs*

47,111

Required minimum gross income*

141,333

Value of the real estate

1,000,000

Minimum equity required

200,000

Annual imputed costs*

58,889

Required minimum gross income*

176,667

Value of the real estate

1,250,000

Minimum equity required

250,000

Annual imputed costs*

73,611

Required minimum gross income*

220,833

Value of the real estate

1,500,000

Minimum equity required

300,000

Annual imputed costs*

88,333

Required minimum gross income*

265,000

Value of the real estate

2,000,000

Minimum equity required

400,000

Annual imputed costs*

117,778

Required minimum gross income*

353,333

* Basis for calculation: 5% imputed interest rate, amortizations, 80% loan-to-value ratio, 1% for maintenance and amortization

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