Real estate financing

The Swiss real estate market is characterized by high prices and a unique financing system that differs considerably from practices in neighboring countries. With a relatively low rate of home ownership (around 40% vs. 65% in the European Union), Switzerland presents a model where the acquisition of a property often represents the most substantial investment in the life of an individual or family. The Swiss banking system, renowned for its stability and rigor, imposes strict rules on mortgage lending. These standards, which were tightened after the 2008 financial crisis, are designed to prevent any risk of a property bubble, while maintaining access to credit for qualified borrowers. Understanding the mechanisms of real estate financing in Switzerland requires an in-depth analysis of the market’s specific features, the credit options available and the regulatory framework governing the sector.

The Swiss mortgage system: fundamental principles

Real estate financing in Switzerland is based on a mortgage system with distinctive features. Unlike in other European countries, Swiss mortgages are generally not designed to be repaid in full at maturity. This is due to tax advantages and a patrimonial approach specific to the Swiss context.

In Switzerland, the purchase of a property generally requires a minimum personal contribution of 20% of the property’s value. Of this 20%, at least 10% must come from “hard” equity, i.e. personal savings or gifts, and not from the second pillar (occupational pension provision) or the third pillar (tied personal pension provision). This requirement is designed to ensure that the buyer has a solid financial base.

Swiss mortgages are traditionally divided into two categories:

• The first rank generally corresponds to 65-66% of the value of the property
• The second row covers the difference up to 80% of the value of the property

This two-tier structure reflects different degrees of risk for the lending institution. The first tier, which is less risky, benefits from lower interest rates than the second tier.

A key feature of the Swiss system isindirect repayment. Unlike direct repayment, where the borrower gradually repays the capital borrowed, indirect repayment involves making payments into a retirement savings account (usually pillar 3a) or life insurance. These savings are then used to repay all or part of the mortgage when it matures, or when the property is sold.

Tax advantages of the Swiss mortgage system

The Swiss tax system indirectly encourages this indirect amortization model because :

• Mortgage interest is tax-deductible
• Pillar 3a contributions are tax-deductible (within certain limits)
• Mortgage debt reduces taxable assets

Nevertheless, real estate ownership generates taxation via rental value. This tax mechanism considers that the owner who occupies his home pays rent to himself, which is added to his taxable income. This particularity is regularly the subject of political debate as to its relevance.

The Swiss regulatory framework requires that second mortgages be amortized within 15 years, or until retirement age at the latest. This rule is designed to reduce household debt levels while preserving long-term financial security. Banks rigorously assess borrowers’ financial capacity according to a prudential rule: housing costs (mortgage interest calculated at a theoretical rate of 4-5%, amortization and maintenance costs) must not exceed one-third of gross income.

The different types of mortgage rates

The Swiss mortgage market offers a variety of products that enable borrowers to tailor their financing to their personal situation and their expectations regarding interest rate trends. The main differences between these options are the length of time over which the rate is fixed and the repayment terms.

Fixed-rate mortgage

The fixed-rate mortgage is the most common option in Switzerland. As the name suggests, the interest rate remains constant throughout the term of the contract, generally between 2 and 15 years. The main features of this type of mortgage are :

• Protection against rate increases during the term of the contract
• Budget planning made easy with constant monthly payments
• Potentially high penalties for early repayment
• Rates generally higher than short-term variable mortgages

The choice of term is a strategic element: a short term (2-3 years) offers generally lower rates, but exposes the borrower to the risk of higher rates on renewal. Conversely, a longer term (10-15 years) offers greater security, but at a higher cost.

Variable-rate mortgage

Variable-rate mortgages follow the trend of the money market. Its rate can be changed by the bank at any time, usually with a few months’ notice. Its main features are :

• Greater flexibility: early repayment without penalty
• Immediate benefit when interest rates fall
• No protection against rate hikes
• Budget uncertainty due to potential variations in monthly payments

This formula is particularly suitable for borrowers who anticipate a fall in interest rates, or who wish to retain a high degree of flexibility, particularly with a view to a medium-term sale.

The Libor/SARON mortgage

The mortgage based on SARON (Swiss Average Rate Overnight, which has replaced LIBOR) is indexed to this Swiss money market reference rate, plus a fixed margin defined by the bank. Highlights of this product are

• Rate adjustment every 1, 3, 6 or 12 months depending on the contract
• Rates generally more advantageous than short-term fixed mortgages
• Conversion to a fixed-rate mortgage possible
• Exposure to short-term interest rate risk

This option is often favored in an environment of low interest rates, or in periods of uncertainty about future interest rate trends.

Mixed and combined mortgages

Many borrowers opt for a mixed strategy, dividing their financing between different mortgage types and terms. This approach makes it possible to :

• Spreading interest rate risk
• Stagger maturities to avoid having to renew the entire financing in an unfavorable interest rate environment
• Combining the advantages of different mortgage products

Some banks offer hybrid products that incorporate features of several types of mortgage, such as stepped mortgages with a progressive or decreasing rate over the term of the contract, or mortgages with flexibility options allowing partial repayments without penalty.

The mortgage process

Acquiring a property in Switzerland involves a rigorous mortgage evaluation and approval process. This process, which can take several weeks, involves a number of distinct stages and requires the preparation of numerous documents.

Preliminary assessment of financial capacity

Before you even start looking for a property, it’s advisable to make a preliminary assessment of your borrowing capacity. Financial institutions mainly examine :

• Gross household income (wages, rental income, etc.)
• Existing fixed charges (other loans, alimony, etc.)
• Available equity (savings, pension assets, donations)
• Credit history and professional stability

This initial analysis provides an estimate of the maximum amount that can be borrowed, which effectively guides the property search. Many banks offer financing certificates to formalize this preliminary commitment.

Putting together a credit application

Once a property has been identified, the borrower must compile a complete file, typically including :

• Last three payslips and annual salary certificates
• Latest tax returns and tax assessments
• Bank and securities account statements
• Certificates from pension funds (2nd pillar) and personal pension funds (3rd pillar)
• Extract from the debt enforcement office (less than 3 months old)
• Property documents (description, plans, etc.)

For freelancers or contractors, additional documents are required, including balance sheets and income statements for the last three years, and a business plan for recent activities.

Property valuation

The lending institution systematically appraises the property that serves as collateral for the loan. This appraisal can be carried out :

• By an in-house expert
• By an independent expert appointed by the bank
• Based on statistical models (for standard goods)

The appraisal takes into account factors such as location, condition, configuration, age and prices for comparable properties. The value retained by the bank, known as the collateral value, is generally lower than the purchase price, particularly in tight markets where there is a risk of overvaluation.

Credit decision and formalization

After analyzing the application and the property, the bank communicates its decision. If it agrees, it issues a financing offer detailing :

• The amount of the loan granted and its distribution between first and second ranks
• Applicable interest rates and their validity periods
• Amortization terms
• Application fees and other special conditions

Once the offer has been accepted, the mortgage contract is formalized. The mortgage is entered in the land register when the deed of purchase is signed at the notary’s office. The bank then pays the amount of the loan directly to the vendor or his representative.

The entire process, from initial application to disbursement of funds, generally takes between 4 and 8 weeks, which must be factored into the acquisition timetable. This period may vary according to the complexity of the file, the nature of the property and the lending institution’s practices.

Strategies for optimizing real estate financing

Buying a property in Switzerland is a major financial commitment that requires careful planning. Various strategies can be implemented to optimize financing and reduce the overall cost of the operation.

Optimizing your personal contribution

The structure of the personal contribution plays a decisive role in obtaining favorable financing conditions. Several approaches are possible:

• Strategic use of pension assets: Withdrawing funds from the 2nd pillar (pension fund) or the 3rd pillar (tied personal pension plan) allows you to increase your personal contribution. This option must be carefully evaluated, as it reduces future pension cover.
• Donation or family loan: Financial assistance from family members can supplement your personal contribution. Donations must be formalized to avoid any subsequent dispute, while family loans must be subject to an acknowledgement of debt.
• Pledging securities: Rather than liquidating a securities portfolio to finance the purchase, it is sometimes preferable to pledge it to the bank. This solution enables you to retain your investments while using them as collateral.

The optimal balance between equity and debt depends on a number of factors, including the tax situation, the return on alternative investments and the buyer’s risk tolerance.

Optimal mortgage structuring

Structuring a mortgage can generate substantial savings over the entire term of the loan:

• Strategic tranching: dividing the mortgage into several tranches with different terms allows you to spread out the repayments and reduce the risk of having to renew the entire financing in a context of high interest rates.
• Combining mortgage products: Combining fixed-rate, variable-rate and SARON mortgages in proportions adapted to the borrower’s risk profile can optimize the average cost of financing.
• Arbitrage between durations: By analyzing the yield curve, we can identify the durations offering the best risk/return ratio. In certain market configurations, medium-term rates (5-7 years) may offer an interesting compromise.

Negotiating conditions with several financial institutions remains a major lever for optimization. Rate differentials between institutions can represent several dozen basis points, or thousands of francs in annual savings for a substantial loan.

Tax optimization of financing

The Swiss tax system has a strong influence on real estate financing strategies:

• Arbitration between direct and indirect amortization: Indirect amortization via Pillar 3a generally offers a tax advantage over direct amortization. Contributions to Pillar 3a are tax-deductible, while the mortgage debt maintained reduces taxable assets.
• Timing of transactions: The timing of transactions (2nd pillar withdrawals, asset sales, etc.) can have a significant tax impact. For example, staggering pension withdrawals over two tax years can reduce the progressive nature of taxation.
• Ownership structure: The choice between individual ownership, co-ownership or joint ownership for couples can influence the overall tax burden, particularly in terms of wealth tax and income tax.

Personalized advice, taking into account all aspects of your wealth and tax situation, is often essential to determine the optimum strategy.

Refinancing and renegotiation

Active monitoring of financing throughout the property’s lifetime enables optimization opportunities to be seized:

• Anticipation of maturity dates: Renegotiation of terms and conditions can be initiated several months before the maturity date of a mortgage tranche, particularly in a low-rate environment.
• Early refinancing: In certain circumstances, it can be advantageous to pay off a mortgage early, despite penalties, in order to benefit immediately from more favorable rates.
• Adapting to changes in the property’s value: A revaluation of the property can help reduce the collateral rate and secure better terms, particularly after renovation work or in a rising market.

Regular competition between financial institutions ensures that you benefit from the best conditions available on the market, and avoids the inertia that benefits lenders.

Current challenges facing real estate financing in Switzerland

The Swiss real estate financing market is going through a period of profound change, driven by economic, regulatory and societal factors. These changes are creating both constraints and opportunities for potential buyers.

The rate environment and its impact

After a long period of historically low interest rates, the Swiss mortgage market is now experiencing a phase of rising interest rates. This new dynamic is substantially changing the parameters of real estate financing:

• Reduced borrowing capacity: Rising interest rates automatically reduce the amount a household can borrow on a constant income, limiting access to home ownership in areas where property prices remain high.
• Pressure on demand: Rising credit costs are helping to slow demand, which could eventually exert downward pressure on prices in certain market segments.
• More complex financing strategies: In a more volatile interest-rate environment, the choice between different durations and types of mortgage products becomes more delicate and requires in-depth analysis.

These rate trends are part of a broader economic context characterized by the return of inflation and the ensuing monetary policy adjustments. Existing homeowners with maturing mortgages face significant increases in their financial charges when renewing their mortgages.

Reinforcement of prudential requirements

Faced with the potential risks associated with the real estate market, the Swiss authorities have gradually strengthened the regulatory framework governing mortgage lending:

• Tighter lending criteria: Swiss Bankers Association (SBA) guidelines and FINMA requirements have been progressively tightened, particularly with regard to minimum capital requirements and amortization rules.
• Countercyclical capital buffer: This macroprudential instrument, which can be activated by the Federal Council on the recommendation of the SNB, obliges banks to hold additional capital for their mortgage exposures, indirectly raising the cost of credit.
• Increased scrutiny of high-risk segments: The authorities are paying particular attention to the financing of investment properties and mortgages granted to borrowers with high loan-to-income ratios.

These measures aim to preserve the stability of the Swiss financial system by preventing the formation of a real estate bubble, but at the same time restrict access to credit for certain categories of buyers.

Evolving financing models

Faced with the challenges of today’s market, new financing models are emerging, while traditional approaches are evolving:

• Participative financing: Innovative models for sharing ownership between several investors, or between an occupier and institutional investors, are beginning to appear on the Swiss market.
• Digitization of the process: Online mortgage comparison and intermediation platforms are gaining in importance, giving borrowers easier access to the full range of offers on the market.
• Integrating sustainability criteria: “green mortgages”, offering preferential terms for energy-efficient properties or ecological renovations, are developing rapidly in response to environmental concerns.

These innovations respond to the need to adapt real estate financing to new economic realities and to the expectations of an increasingly diverse and demanding clientele.

Legal implications and professional support

In this complex and changing environment, the support of legal professionals is particularly valuable. A specialized law firm can provide significant added value on several levels:

• Legal security of transactions: Verification of easements, pre-emption rights, analysis of co-ownership regulations and restrictions on use of the property.
• Optimal structuring of the acquisition: Advice on the most suitable ownership regime (individual ownership, co-ownership, real estate company) depending on wealth and tax objectives.
• Contract negotiation and review: Critical analysis of mortgage contracts, identification of unfavorable clauses and negotiation of amendments with financial institutions.
• Estate planning: integrating real estate acquisition into an overall wealth transfer strategy, particularly relevant in the Swiss context where real estate is often a household’s main asset.

The involvement of a legal expert enables us to anticipate potential difficulties and adopt a proactive approach to the regulatory changes that regularly affect the Swiss real estate market.

The increasing complexity of the Swiss real estate financing market makes it more necessary than ever to adopt a personalized, multidisciplinary approach, integrating financial, tax and legal considerations. With this in mind, collaboration between financial and legal experts is a major asset for effectively navigating the current environment and optimizing your real estate investment over the long term.