Prepared for the future within your own four walls
By Markus Skupch of Swiss Life Ltd.
The dream of owning your own four walls is as old as mankind itself. Creating a home means more than simply finding a place where you can feel safe and relaxed. A true home is somewhere that gives you independence and freedom!
Many people are discouraged from realising the dream by anxiety about the great financial burden. But it is actually worth stopping to take a good, hard, professional look at your situation.
Most of us cannot afford to buy our dream property in cash.... so, we require a mortgage. Financial institutions all have their own internal regulations but most will grant a mortgage based on market value, so in certain areas, where there is a danger that property valuations are inflated, financial institutions will possibly lower their commitment, thereby reducing their loan to value.
The basic home financing deal is calculated on the following basis:
1. 20% down payment of the property value (minimum 10% cash and the rest may be taken from the pension fund),
2. 80% mortgage of which 65% of this represents the first mortgage and does not need to be repaid (depending on your financial situation at retirement),
3. Second mortgage, which represents 15%. This mortgage needs to be repaid (directly or indirectly) over 15 years.
What can I afford?
In essence, the calculation below is used by the financial institutions, working with inflated interest rates (if interest rates increase), and is commonly known as the stress test. The below represents yearly costs:
1. 1% of the purchase price (ancillary and maintenance costs like heating, hot water, replacement of windows, re- painting facade, etc.)
2. 5% mortgage interest rate
3. Repayment over 15 years of the second mortgage capital (amortisation)
If the above costs are lower than 33.3% of your gross annual salary then a mortgage is generally granted.
Direct versus indirect amortisation
With direct amortisation, you pay back your mortgage to the financial institution in regular instalments. The mortgage debt is thus steadily reduced as are interest rate payments. However, your tax liability also increases as you are granted fewer deductions.
With indirect amortisation, you invest into a private pension savings account or life insurance policy under what is known in Switzerland as Pillar 3a/b. The mortgage thus remains at the same level for the full duration - allowing you to make ongoing tax deductions of mortgage interest and the savings can be used to repay the second mortgage (and parts of the first), at the end of the period.
We suggest that the process of buying your dream home be used to take stock and to obtain a financial overview. Questions that should be answered:
- - Will my home be affordable at retirement?
- - What effect would the loss of the main income earner have for the rest of the family?
- - What are the overall tax implications?
Take your time, check the facts and turn the dream into your Swiss home ownership reality!
This article is brought to you in partnership with
General Agency Zug // Industriestrasse 53 // 6312 Steinhausen
+41 41 729 24 92