Analysis of the financial impact of your real estate purchase
It’s quite easy to identify expenses when you’re a tenant. All in all, we have: 1) the rent and 2) utilities.
On the other hand, there are numerous – and sometimes hard to recognize – expenses when you become a homeowner.
It’s quite easy to identify expenses when you’re a tenant. All in all, we have: 1) the rent and 2) utilities.
On the other hand, there are numerous – and sometimes hard to recognize – expenses when you become a homeowner.
One must take into account that:
Debt cost (the mortgage interest):
Depending on the equity brought in and the current mortgage rates, you can calculate the annual cost you got to pay to the financial institution.
The amortization of your future home:
In Switzerland, the Swiss Financial Market Supervisory Authority (FINMA) [Autorité fédérale de surveillance des marchés financiers in French; Eidgenössische Finanzmarktaufsicht in German] obliges banks and insurance companies to demand an annual amortization until the loan reaches 66% of the property price.
Maintenance costs:
Becoming a homeowner implies annual maintenance expenses to keep the value and condition of the property.
Annual property tax:
Property tax is a tax charge that is calculated each year on the basis of the tax value of your property and the canton and municipality in which your property is located.
Property transfer duties at the time of purchase:
In addition to the equity used to finance part of the price (at least 20%), you’ll have to pay high taxes at the time of the property transfer: between 3% and 5% of the price.
The loss of income related to the equity:
Until the day you buy the property, the necessary equity can be freely invested and thus yield returns. Following the payment, you will no longer be able to use those revenues and as a result you will no longer be able to benefit from their returns.
Once this analysis has been carried out, you’ll have a precise idea of the evolution of your finances over the short, medium, and long term.
Analysis of the tax impacts of your real estate purchase
In addition to the economic aspects, the purchase of a property profoundly affects your income and wealth taxes.
In addition to the economic aspects, the purchase of a property profoundly affects your income and wealth taxes.
Once you’ve reached this stage, you’ll notice these changes:
Rental value:
It’s a phantom income calculated by the taxman which will be added to all your other incomes as long as your property is not rented out – the goal being to simulate the rental of your property. In short, it’s as if you were paying yourself a rent to live in your own home. This unfortunately increases your income taxes...
Mortgage rates:
The interest rate you pay is going to be fully deductible from your income. So, the higher the rates, the bigger the deduction!
Payment in instalments [amortization in the US and repayment mortgage in the UK]:
If you opt to pay off your mortgage using an indirect amortization, you will be using your 3rd pillar to pay off part of the mortgage loan. In this case, you can take advantage of the deductibility of the private pension plan to lower your taxes. However, if you choose the other option and pay off the loan using direct amortization, you can't expect any deduction, apart from saving on the debt amount – don’t worry, we’ll spell it all out.
Maintenance costs:
Or when you’ve got to invest money in order to hold the value of the realty over time; tax authorities have agreed not to tax these sums anymore. This deduction may be flat-rate and will depend exclusively on the age of your property and its rental or effective value. Each franc you wish to deduct must be justified.
This tax analysis will help you make informed choices. Direct or indirect amortization?
Thanks to the first analysis, you’ll also be able to carefully budget your expenditures and determine the quality of this financial transaction.
Creditworthiness calculation and financing optimization
Now that we’ve carried out our analyses, you feel like going ahead with your project of buying a home?
Now, we need to get across two important points before we can file your mortgage application: equity and creditworthiness!
Now that we’ve carried out our analyses, you feel like going ahead with your project of buying a home?
Now, we need to get across two important points before we can file your mortgage application: equity and creditworthiness!
1. Equity (or equity capital, personal money)
When buying a principal residence on Swiss soil, the rule is that at least 20% of the value of the property must be provided or guaranteed by your own means:
- Personal saving: Any form of savings is accepted (savings account, salary, cash)
- 3rd pillar: Whether you have bank or insurance assets, you are going to be able to use your 3rd pillar as a down payment.
- Advance on inheritance/donation: It’s not uncommon that parents or grandparents, while they’re still alive, want to help a loved one to carry out their project. These donations can be used to put up the starting equity capital they need.
- Investment: This is also a funding opportunity, though not always recommended to close out your positions. It’s not always the right time to sell out. You had better not be disinvesting your money if it’s not essential for the progress of your real estate project.
Here, the important question isn’t only how to raise the requested sum, but more specifically, in what way? Is it better to provide the equity in cash? Or wouldn’t it be more interesting to pledge this capital as collateral? Both options have advantages and disadvantages you shouldn’t underestimate.
2. Creditworthiness or keeping up with your bills
If you want to take out a mortgage loan, you need to have sufficient income so that your bank or insurance company doesn’t worry. Prior to submitting your application, we’ll take the time to assess your income and expenses to make sure the chosen scenario is possible and, if need be, make any necessary changes.
Filing your mortgage application
Once the analyses are completed and your financing and creditworthiness have been verified, we can move on to the most important step: obtaining all the supporting documents and building up the file of which we’ll submit the application to various institutions.
Once the analyses are completed and your financing and creditworthiness have been verified, we can move on to the most important step: obtaining all the supporting documents and building up the file of which we’ll submit the application to various institutions.
There are several criteria on which a financial institution deliberately favors certain applications:
- The mortgage amount
- The financial soundness of the loan applicant
- The property’s geographical location
- The complexity of the file
The name of the game is to build up a tailor-made file and to submit it only to appropriate institutions. Given the amount of money at stake, there’s going to be dramatic differences regarding the offers we’ll receive.
Carry out your real estate project with FBKConseils
1. The first meeting – free of charge!
Our first meeting is a chance to get to know each other and to answer your first questions so that you understand the ins and outs of your real estate purchase. We’ll explain you how we proceed, what documents we need to complete our study and then build up your file.
2. Analyzing your case!
During this phase, we’re going to analyze your application to evaluate the economic and fiscal impacts of the acquisition on your budget. We’ll also find the best way to raise the equity and ensure that your expenses are covered.
3. Presenting you the results!
We’ll meet up by videoconference or in our office to show you what we’ve found as well as answer all your questions.
4. Filing and sending in your mortgage application!
Once you are clear, we'll gather all the documents you need and submit your application to the institution(s) that will most likely lend you the amount you requested for your purchase.
5. The agreement in principle!
Examining your application can take up to a few days – maybe weeks. As soon as we reach a first agreement with the financial institution, we will let you know about their proposal and, if necessary, we’ll proceed to release the capital from your 2nd & 3rd pillar pension accounts.
6. Signing your mortgage deed!
Once the steps have been taken and the definitive agreement has been reached, you can sign the deed at a notary’s office [in civil law, a notary is the equivalent of a UK solicitor or a US real estate lawyer or signing agent – Notar in German; notaire in French; notaio in Italian], and, at last, purchase your property!
Rates and time frame for paying off my mortgage
We offer such a service for a price ranging from CHF 500 for standard applications to CHF 1’500 for more complex cases. The invoice is to be paid once your application is complete and the signing of the deed at the notary (property solicitor/real estate lawyer)’s office is scheduled. The time needed between the first appointment and the signature can vary from one to several months depending on the complexity of your file.
We can identify 4 criteria for comparing different mortgage loan offers:
o The rate and the duration of the mortgage loan: Usually, the longer the loan lasts, the lower the rate will be and consequently the interest you’ll have to pay. In mid-2023, this theory (in principle respected) was reversed: the longer the loan, the lower the rates.
o The payment in instalments/amortization
o The charge incurred for breaking the contract: It’s possible to find institutions that do not impose any such penalty clause – it’s a huge advantage!
Between 2019 and 2021, it was possible to find 10-year fixed rates around 1%. For shorter terms, rates were as low as 0.5%. Since the beginning of 2022 until mid-2023, economic, health, and political stresses have pushed rates to over 3% for a 10-year term. Since the end of 2023 and the beginning of 2024, yields have fallen back slightly to around 2%-2.5% for 10-year bonds.
Using your 2nd pillar pension is often one of the only ways to raise the 20% equity you need. However, withdrawing from your 2nd pillar account doesn’t come without risk. By doing so, there’s a high chance that you cut your retirement benefits, and in some cases, your invalidity and death benefits as well. In addition, you will have to pay tax on the withdrawal of your 2nd pillar. Running a retirement income simulation is highly recommended before making your decision.
You can opt to pay your mortgage at a fixed, variable or Libor rate. The latter reference rate has been abandoned in 2021 and replaced in Switzerland by the SARON (Swiss Average Rate Overnight), the overnight interest rate at which Swiss banks borrow from each other for one day. Since its introduction, rates have been negative. For some months now, this "dream" has been over, and the rate curve has started to rise again. Currently (at the end of 2023), the Saron rate is 1.69%. You will need to add to this rate the bank's margin, which ranges from 0.6% to over 1%, depending on your financial institution. Finally, if you opt for a Saron mortgage, you'll have to pay mortgage interest of between 2.3% and 2.6%. Furthermore, as rates change rapidly and are not locked in, your mortgage charges may vary throughout the term of the contract.
A direct amortization is the consistent repayment of your debt every year, and, as a result, not only the amount of the debt is regularly reduced, but also your mortgage interest. With indirect amortization, the amount to be repaid will not be paid directly to the bank, but to a 3rd pillar account, and then paid in a lump sum to that bank at the end of the contract term. This allows you to take full advantage of the tax benefits associated with holding a large mortgage debt.
A forward mortgage is nothing more or less than a fixed rate mortgage. A forward rate agreement (FRA) allows you to minimize your risk. You can fix today’s rate for the future. It has the advantage of being secure, while its disadvantage is that your bank is going to take a margin on the current rate to protect itself and to make the transaction profitable. The longer you lock in a rate, the higher their margin and consequently their rate.
