11.12.2023
In general, a maximum of 80 percent of a property can be financed by mortgage lenders. You must pay for the rest out of your own pocket. But it may be worthwhile to declare more than the required 20 percent of your own equity when applying for financing. The more equity you use for the purchase, the more attractive the interest rates can be.
Your own funds or equity are the portion of the financing of your home that you pay for yourself. These can be contributed as cash, thereby reducing the mortgage amount. Alternatively, your own existing funds are pledged to the lender (e.g. 3rd pillar balances) and do not reduce the mortgage amount. This article explains which form is right for you.
You can use the following assets as your own funds for owner-occupied property: account and savings balances, securities and funds, pension funds from the pension fund (2nd pillar) and pillar 3a, as well as loans, gifts and advance inheritance payments. The assets of a second person (joint debtor) from marriage or cohabitation can also be used.
At least 10 percent of your real estate financing must come from what is known as “hard equity”. This is money that you can essentially put on the table – primarily account and savings balances or assets from the sale of investments. The remaining funds can also come from the anticipated withdrawal of tied assets from the 2nd or 3rd pillar. For example, insurance or pension fund money. An interesting alternative to an anticipated withdrawal is pledging it in favour of the lender. This means that your mortgage lender accepts the capital as security. If you can no longer pay the mortgage, the lender can draw on the capital. But take care: the more of your equity that comes from tied assets, the more income you will need in order to make your financing affordable.
Obviously, you can use freely available savings as equity. You can access this money without restrictions and use it for your own purposes. However, caution is also advised: don’t raid your entire savings account to buy a house. Be sure to factor in reserves, such as additional costs for construction/conversion or renovations.
Freely available capital that you can access at any time.
Your savings are tied up in home ownership and can no longer be used for other goals such as travel.
Keep enough reserves in your account to pay for unforeseen expenses.
You have the option of selling existing securities such as shares or investment funds in order to use them as your equity. You should pay attention to price fluctuations so that you do not sell your securities at a loss. If you pledge securities, drops in price can pose a risk to the affordability of your property.
You use money that you don’t need to live on and protect your account balance.
Depending on the share price, you may have to accept a loss in value when you sell.
You can also pledge securities. This provides a double benefit: interest on the capital market and better mortgage interest rates.
Like securities, insurance policies can also be pledged. The redemption value of the policy is imputed as between 60 and 90 percent.
You do not have to amortize the portion of your mortgage that is secured by pledged assets.
You usually have to pay your lender the imputed amount in one go at the end of the financing term.
Pledge your life insurance instead of your pension fund assets to avoid the risk of insufficient retirement provision.
Anyone accessing a pension fund can withdraw the funds as cash or have them pledged by their financial institution. The (anticipated) withdrawal of pension funds results in the pension fund reducing your retirement benefits and possibly also your risk cover. If you withdraw credit in advance, you should compensate for the reduced coverage through separate insurance, especially as a family. Especially in the event of disability or death, poorer financial security can have serious consequences for the entire family. You can also pay back withdrawn amounts later to avoid possible pension gaps. It is easier to pledge your pension fund assets as additional security. In this case, the money remains available to you for your pension. You have to amortize the funds used by the time you retire.
Useful information: your pension fund must approve both options, but this is not usually a problem.
With pension fund assets, you can massively increase your equity and thus improve your mortgage offers.
You must pay tax on capital paid out from your pension fund. You must amortize pledged pension fund assets.
Use a maximum of as much credit from your pension fund as is necessary to improve your offers.
Money from pillar 3a may also be used to finance owner-occupied residential property. The pillar 3a funds can be pledged or withdrawn in advance, as is the case with pension fund assets (see above). It should be noted that early withdrawal of pillar 3a assets has tax implications. The amount withdrawn is taxed once as income when it is paid out, but separately from other income and at a lower rate (special assessment).
Higher tax deductions can be claimed when the property is pledged.
Anticipated withdrawals of capital from pillar 3a must be taxed and reduce your private retirement provision.
Use your pillar 3a account for indirect amortization after taking out a mortgage. This means that instead of making a direct annual repayment of the mortgage, you pay annual contributions to the pillar 3a account that are deductible from your taxable income.
Other financing options include gifts and advances against inheritance. However, the compulsory shares belonging to the other heirs must not be violated, and the corresponding amount must be included later in the division of the inheritance without the need for an additional written agreement. In some Swiss cantons, gifts or advances against inheritance are taxable. You should therefore do some research in advance and take into account possible tax payments.
You benefit from assets your parents have at their disposal.
You must record an advance against inheritance or a gift in your will in order not to disadvantage other people entitled to inherit.
Clarify the gift tax or tax liability for advances against inheritance in your canton.
Of course, you can also get a loan from your family or friends. However, it should be noted that interest and repayment rates must be taken into account when calculating affordability. Because you will be receiving the money from your nearest and dearest, you should ensure that you contractually regulate the term, repayment and interest rate. This ensures that you protect your personal relationship in the event of any delays in repayment.
You often receive additional money at low interest rates or even interest-free.
Interest and repayment rates place a strain on your affordability (and possibly also on your relationship with the lender).
Ensure that you contractually regulate the term, repayment and interest rate of the loan.
Other requirements apply when financing non-owner-occupied property. To purchase holiday apartments and investment properties, you need significantly more than 20 percent equity. At the same time, you cannot use any funds from your fixed pension plan for the financing.
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The share of equity is calculated based on the property value. The equity capital used for financing should generally be at least 20 percent of the property value so that the mortgage interest burden does not become too great. Note that at least 10 percent of the purchase price must come from credit outside the 2nd pillar/pension fund (anticipated withdrawal and pledging).
We recommend using your assets to finance your home ownership preferably in the following order: account and savings balances and other assets > pillar 3a > 2nd pillar/pension fund.
It is not recommended to take out a personal loan or a collateral loan to use the money for real estate financing. This is because the loan interest rates worsen your credit rating, which in turn leads to higher mortgage interest rates. It is better to pledge assets from securities or private retirement planning.
