Equity
The first thing to be determined when considering a real estate purchase is the amount of equity that can be leveraged. The equity must amount to at least 20% of the purchase value of the real estate sought. For example, a real estate asset worth CHF 1 million would require at least CHF 200,000 worth of equity to be leveraged, on top of which solicitors' fees would need to be added.
Half of the equity should consist in cash savings, for example from a savings account or from a 3rd pillar, and the remaining 10% can come from other forms of financing. It is possible to leverage a 2nd pillar (also called an LPP or compulsory work pension) after having agreed with the relevant pension provider the potential amount available for the purpose of purchasing real estate. Equity cannot come from a repayable loan.
Mortgages
In most cases, a buyer will not be able to cover all of the purchase costs at the time of the transaction and will need to contact a credit provider. The schedule, rate and duration of a loan, as well as the agreed rate of advance, are all defined by the equity and amortisation amount. The default rate for a loan is set at 5%, in accordance with FINMA guidelines. These are only guidelines, however, and the rates are currently between 0.8% and 1.4% over 10 years, depending on the provider chosen.
Default interest rate = (purchase price – equity) * 5%
Actual interest rate = (purchase price – equity) * 0.8% to 1.4%
Credit providers
Many people are unaware that credit can be obtained from places other than just banks. Insurance providers, pension funds and other specialised institutions can also provide credit. The following is a non-exhaustive list of establishments that may be contacted for such purposes, organised into categories.
Traditional banking institutions:
- UBS
- Crédit Suisse
- Raiffeisen (French)
- Banque Cantonale de Genève (BCGE)
- Banque Cantonale Vaudoise (BCV)
- Banque Migros (French)
- Crédit Agricole next bank (Switzerland)
- BNP Paribas (Switzerland)
- Société Générale (Switzerland)
Private banking institutions:
Insurance providers:
It is also possible to get in touch with financial advisers who are specialists in real estate. These experts can provide you with personalised support throughout your purchasing journey. A detailed analysis of your situation will help you identify the method of financing that would best suit your needs. The companies below are a few examples:
Amortisation
A credit provider usually determines that one third of the market value of the real estate must be amortised over 15 years. Once capital is subtracted from this amount, the annual amortisation amounts to approximately 1% of the total amount borrowed.
Amortisation can be direct or indirect. In the case of the former, amortisation is carried out through regular payments. This decreases the amount of mortgage interest, but it does not allow for tax deductions and it increases the tax rate. Alternatively, indirect amortisation consists of regularly paying funds into a retirement savings account 3a. In this way, the interest remains stable but the tax burden of the buyer decreases, thanks to the deduction of these interests from the taxable income.
Additional costs
When calculating the amount needed to purchase real estate, it is important to remember the additional costs which are added to the acquisition costs. This includes PPE (propriété par étage / condominium) charges which cover the ongoing maintenance costs of a real estate asset. They are usually around 1% of the purchase value per year.
Actual financial cost
Taking into account the previous points, it is possible to calculate the actual financial cost using the following formula:
Actual financial cost = mortgage interest + amortisation + PPE fees
The actual financial cost cannot exceed 33% of the buyers’ monthly income. If it is greater than this amount, there is a high risk that the credit provider will refuse the loan.
Summary
In this article, we have discussed the fundamentals of real estate financing, but there are many other things to consider when purchasing real estate. Please feel free to contact the Pilet & Renaud sales department, and our brokers will be more than happy to assist you throughout this process and to answer all your questions.
