European mortgages explained: Switzerland

Mortgages in Switzerland have a basic, straightforward idea but are subject to rather strict lending rules. Banks are currently using a 4.5% theoretical interest rate as a reference. Some are even using a 5% sample rate. On top of that, they are accounting for 1% amortization per year. And depending on the bank, they will account for between 0.5% and 1% in maintenance costs. Furthermore, the cost of the chosen property can’t be higher than 33% of the income. So the 5% of the mortgage needs to be smaller than 33% of the income. In general, the mortgage will be 80% of the house value.

If you live in Switzerland with a residency permit B or permit C, you can apply for a mortgage and buy a property in Switzerland. If you don’t have residency, it’s slightly more complicated. Under the Lex Koller law – which limits purchases of Swiss property by foreigners – non-residents must apply for a license to buy from their cantonal authority.

There are a few additional costs when buying a Swiss home. These generally equate to between 0.25% and 3.55% of the property value, depending on the canton it is in. The added costs will usually have to be paid at the point of sale or soon after. Some banks may allow it to incorporate these costs into the mortgage repayments although this is not common.

Property in Switzerland is treated as an asset, meaning it is subject to both wealth and income tax.

There are three main types of mortgages in Switzerland:

Fixed-rate mortgage is valid until a certain expiration period. This interest rate, which is fixed in advance, has the advantage that it is not subject to fluctuations during the specified period. Fixed-rate mortgages in Switzerland can be set for certain durations, usually up to a maximum of around 15-20 years.

Variable-rate mortgages, by contrast, have continually adjusted interest rates. The benefit of this mortgage is that one will usually benefit from a lower interest rate initially than one would on a fixed-rate mortgage. One also normally has the flexibility to switch to another type of mortgage later on. Additionally, as these mortgages are often offered with no minimum monthly repayment amount, it can take a long time to repay the mortgage. It is not unusual for Swiss mortgages to last 30–50 years, sometimes longer.

Money market mortgages (LIBOR) generally run for a period of 3 or 6 months. At the end of each period, the interest rate may be adjusted up or down. LIBOR mortgages are typically short in duration, often lasting only up to 5 years. Swiss mortgage lenders are phasing out LIBOR mortgages and replacing them with Swiss Average Rate Overnight (SARON) mortgages by the end of 2021. These will operate very similarly to LIBOR mortgages with changing interest rates and rollover periods. The main difference is that they use the Swiss money market rather than global London-based banks.

This article was written by Magdalena Szabo, a German apprentice studying Business Administration.

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