Perhaps you’ve already seen a home, that you’d like to buy. Suppose it costs 600,000 Francs. You need 20 percent of the purchase price as equity to get a mortgage from the bank. In this case that would be 120,000 Francs.
You don’t need to have the requisite sum under your pillow or in your bank account. Your equity can come from many different sources. These include for example:
- Interest-free loans from parents or relatives
- Inheritance advances and gifts
- Unencumbered building land
- Money from the 2nd and 3rd Pillars
Bear in mind though: at least 10 percent of the property price must be financed with equity that does not come from your company pension scheme.
Early withdrawal from the 2nd and 3rd pillars – what you should know
You can only use credit from your pension fund and the 3rd pillar to buy or build a house if you yourself will live in the home.
With pension funds you have the possibility to pay back in again later the amounts withdrawn. Thereby you can avoid potential pension gaps. Alternatively, you can pledge all or part of your pension fund credit for the purchase of your home.
You can freely use the credit in your Pillar 3a as equity for your house. Bear in mind though that you can withdraw a part of this pension fund only more than 5 years before you reach retirement age. In addition, you must pay tax on an early withdrawal. And you can’t pay the money back in later.
How expensive could your house be?
Now you can work out how much equity you have at your disposal. Still in order that your home is really affordable, the monthly payments must not be too high. To find this out, you should ask yourself the following 2 questions:
How much will your home cost each year?
Most banks employ a mortgage interest rate of 5% to assess the affordability of a financing. This would denote an imputed interest rate. It should ensure that the financing is still affordable for you during times of high interest rates. If the actual interest rates are lower, then your charges would fall correspondingly lower.
Over and above that you will pay around 1% of the property value on maintenance and ancillary charges each year.
Also if you have financed more than two thirds of the property value with debt you must amortise this excess to below two thirds within 15 years. Thus you will in addition incur amortisation costs.
How much of your income should your housing costs account for?
In order to be able to pay your housing costs, they should add up to at most a third of your gross income. Don’t calculate it too close to that, or your budget may not be able to cope with an increase in interest rates or drop in income.
Whether you can comfortably afford your dream house can be find out with a mortgage calculator. Based on your equity, sales price and annual gross income it is calculates whether a house is affordable for you. You will also see how high the monthly costs will be.
See what the costs of your own home are made up of with this case study of the Bucher family.
More equity than needed? Don’t invest everything in a house.
If you have more than 20 percent equity, then you can put it all into the house and take out a lower mortgage.
It could be to your benefit though if instead you profitably invested a portion of your equity. In doing so you could offset the higher mortgage and in fact still save. Seek some advice.
The ABCs of financing
How do I finance my own home? Our guide gives valuable financing tips.