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In most cases, your own funds will only cover part of the purchase price of your desired property. Most of the price will be financed with a mortgage, in other words, with a loan from a bank that is secured by the property. We explain how it all works and what else you need to know.

What is a mortgage?

A mortgage is a long-term loan provided by a bank for the purchase of a property. The residential property or real estate serves as collateral for the bank. When taking out a mortgage, you usually have to finance at least 20 percent of the property value as determined by the bank with equity, i.e., your own funds.

Half of these funds must be “hard” equity. This refers to securities, account and savings balances, retirement savings or inheritances. The remainder, i.e., “soft” funds, can be withdrawals or pledges of money from your pension fund. Up to 80 percent of the property’s value can be covered by a mortgage. You can find out more about equity here.

An important concept in the context of mortgages is affordability.

Video guide

What is a mortgage?

Our experts explain the key points about mortgages in a series of short videos.

Affordability: the financial requirements for a mortgage

The term affordability refers to the relationship between the ongoing financial expenses of a property and the borrower’s income. During the affordability test, the lender, such as a bank, checks whether the financial requirements to cover the total cost of the home are met. The following applies: Your home’s total running costs must not exceed one third of your gross annual income. These costs are broken down as follows:

  • Mortgage interest rates
  • Ancillary costs of the property
  • Amortization costs for the second mortgage

The special feature of the affordability calculation is that it is carried out on the basis of imputed interest costs and not current interest rates. The imputed interest rate, which is usually five percent, ensures that financing is possible even if interest rates go up.

Mortgage calculator: What is the most I can afford to pay for a place of my own?

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First and second mortgage

When it comes to financing your own home, you’ll usually need to take out not just one mortgage but two. This is because only up to a maximum of 67 percent of the property value can be financed with the first mortgage. This mortgage does not have to be amortized, i.e., paid back. You can finance a further 13 percent of the real estate value with a second mortgage. This must be paid back within 15 years or before you reach the reference age for retirement, whichever comes sooner.

Amortization: direct and indirect amortization explained in simple terms

The regular repayment of part of the mortgage over a defined period of time is called amortization. A distinction is made between direct and indirect amortization.

  • Direct amortization
    With direct amortization, the debt is reduced by a fixed amount on a regular basis, usually quarterly. This reduces the amount of debt and the interest burden.
  • Indirect amortization
    In the case of indirect amortization, the debt remains. As a homeowner, you pay the amortization amount into a 3a pension solution, for example, which is pledged to the bank as collateral. This is how you build up retirement savings. When you retire, the capital is paid out and the mortgage is repaid by this amount.

How mortgage financing works

To finance your home with a mortgage, you need to do the following.

  1. Consultation: The first step is to obtain advice from a mortgage advisor. They will show you different options and work with you to determine the best strategy for you.
  2. Loan agreement: After you and your advisor have worked out a financing proposal together, the loan agreement is signed.
  3. Purchase of real estate, mortgage note as security: After signing the purchase agreement you become the owner of your dream home. But remember: your property is collateral for the bank.
  4. Mortgage payout: The bank pays you the mortgage amount in accordance with the purchase agreement.
  5. Mortgage interest and amortizations: From now on, you will make regular mortgage interest payments to the bank and repay your mortgage by means of amortization.

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What is mortgage interest?

Mortgage interest is the cost of the loan you take out. This interest is an essential part of your financial obligations under a mortgage agreement. The amount of interest depends on the term, the type of mortgage and the current mortgage interest rate. The level of mortgage interest rates, in turn, depends on the market situation and is strongly influenced by factors such as inflation or key interest rate hikes by the Swiss National Bank (SNB).

What will happen to interest rates?

Our interest rate forecast informs you about current interest rates and how they are developing – free of charge by email.

What types of mortgages are there?

There are different types of mortgage. To finance your property without any worries, a combination of short- and long-term mortgages is ideal. The following options are available:

Fixed-rate mortgage:

With a fixed-rate mortgage, the interest rate remains the same for the entire term of the mortgage. This makes it easier to budget and protects you from rising interest rates. However, you will not benefit should interest rates fall.

SARON mortgage:

With a SARON mortgage, you have to accept interest rate fluctuations but will benefit if interest rates are low or falling. The interest rate on a SARON mortgage is usually lower than that on a fixed-rate mortgage.

Building loan:

A building loan is not a mortgage in the conventional sense. However, this form of financing is suitable if you are planning a new-build. The loan amount can be determined flexibly. At the end of the construction period, a building loan is converted into a mortgage.

Conclusion

As with other financing solutions, it is important to be well informed about your options and to study them all carefully. Feel free to contact your client advisor for further advice.

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