Financing my real estate purchase: what is my mortgage loan made up of?

In Switzerland, in most cases, a real estate purchase is financially divided into two main components:

– The equity: this is the piece of the real estate price that you will have to fund. We share everything you need to know about it in a dedicated paper.

– The mortgage: The debt that will be added to the equity in order to raise the full price asked by the seller.

This paper focuses on the external funds, also known as the mortgage, the loan or the debt. When taking out a mortgage, the contract is usually split into two segments or layers, called ranks.

In this article you will discover all the specifics of a mortgage contract and the role of banks and lending institutions in the acquisition of your home.

What mortgage financing is made of?

As usual, we have pictured the financial aspect of a real estate purchase:

The 1st rank represents 65% of the property (or exactly 66.66%). The second one, 15% (13.33%). If the apartment you are hoping to buy is worth 1 million CHF on the market, you will have to gather at least 200,000 CHF and then the bank will loan you 800,000 CHF, of which 650,000 CHF will be of 1^st rank and 150,000 CHF of 2^nd rank. 

The difference between the two is that you have to reimburse the 2^nd rank over a maximum of 15 years or, at the latest, before retirement age. Whereas for the 1^st rank, there is no time limit and, in most cases, it is never reimbursed. It can even be inherited.

Example of a mortgage financing

Breaking down the purchase price

Let’s take myself as an example. After having decided to purchase with Zoé and after a bit of research, we ended up finding a pure gem on the edge of the city, in the charming commune of Chalet-à-Gobet. 

The bank agreed to loan us the necessary amounts, at a fixed rate of 1.2% in 2021, which unfortunately is no longer the case entering 2023. Today, rates have risen by at least 1.3% to reach 2.5%..

The sale price being 770,000 CHF, our personal contribution amounted to 154,000 CHF, the 20% individual funds required by the bank. We therefore need a mortgage loan of 616,000 CHF split as follow: 500,500 CHF of 1^st rank and 115’500 CHF of 2^nd rank.

If you want to calculate all these elements for your own situation, you should check out our solvency calculator!

How does the repayment of the 2nd rank work?

As explained above, when you inject less than 34% of equity, i.e., when your equity represents 20% to 34% of the full price, you are required to take out a 1st and a 2nd rank. In any case, you will have to repay the 2nd rank over a maximum period of 15 years, or before the day you retire.

Case 1: We are under 50 years old

Since we are less than 50 years old, we can repay the 2nd rank in the next 15 years. Thus, to the 7,392 CHF responding to annual interests, 7,700 CHF are added. Each month of the first 15 years, we must repay 1’257 CHF. Then once the amortization is completed (i.e., the 115’000 CHF repaid), there will only remain the interest on the debt to be paid, which represents 7’392 CHF per year (616 CHF per month).

Case 2 : We are 55 years old

Let’s say I’m 55 years old (just for the example of course!) And that I therefore am 10 years away from the legal retirement age… Yes, It happens for everyone!

In this case, I will have to reimburse the 2^nd rank in 10 years because I will be retired at 65 years old. So, to the 7,392 CHF, 11,550 CHF are added. I will therefore have to pay 1,578.50 CHF for the first 10 years. Then, 616 CHF after the first 10 years.

This reimbursement over 15 years is called amortisation. 

There you go, now you know what your debt is made of. 

How to pick a mortgage contract?

In Switzerland, banks do not have a monopoly on mortgage loans. Some pension funds and many insurances also offer alternatives to finance your future home. While the financing mechanism above described is similar for all types of institutions, some major contract type differences must be acknowledged, specifically when it comes to rates and duration.

Fixed term contracts

Whether it is for the 1st or the 2nd rank, you will have the possibility to subscribe to a fixed term contract, setting the rate applied over a given period. The longer the duration, the lower the rate.   Rates vary every day, making the examples that we could give you quickly obsolete. Nevertheless, here are some directional variations that can be observed, depending on the duration chosen:

So, how to select the best fitting duration? As in all forward-looking matters, there will never be a guaranteed answer. If you are rather risk averse, do not like volatility and want to be able to plan your future expenses to the nearest franc, then consider this: the longer the term, the greater the predictability and thus, the security. If, on the other hand, you are unafraid of surprises (good or bad) and do not want to miss a potential chance to reduce your mortgage interests burden, you probably should stick to short terms, keeping in mind the risk rate hikes. It’s up to you!

Last but not least, fixed term contracts can be time bombs in some cases. If personal reasons (divorce, transfer, unemployment, health, etc.) require you to sell your property before the end of the term, beware of the substantial financial penalties that the lending institution may claim.

Saron contracts

Have you ever heard this terminology? Not so long ago, this word did not exist. We used to call it Libor mortgages. Not very different, the Saron is the rate at which banks do business with each other over extremely short periods of time (exchange, loan of money).

Until the end of 2021 or even the beginning of 2022, the Saron rate was negative (below 0%). This means that in order to borrow money, you had to earn interest. Curious, isn’t it? In order not to make it nonsense, the banks apply a margin on the Saron rate, varying according to the institution (between 0.5% and 1%).

In short, until 2022, borrowing at the Saron rate was equivalent to borrowing at the bank’s margin rate. Since then, the SNB (in agreement with the other central banks), has undertaken to significantly raise the rates and thus make the Saron rate positive again. If the situation remains bad, the risk of seeing the Saron rate further rise along the cost of debt is not excluded.