What should you check if you are taking over a mortgage?

Many emotions come into play when deciding whether or not to take over a mortgage. If the property ticks every box for you in terms of location, size and aesthetics, you are probably willing to make lots of compromises. However, you should take a long hard look at the facts and the consequences: what exactly are the conditions of the financing you would be taking over? Could you live with them? Specifically, these are the key figures that matter:

• Interest rate: is it higher or lower than the current market interest rate? What would these two scenarios mean for you?
• Term: how long does the fixed-term mortgage have left to run? Will you hold onto the property until at least the end of the mortgage term?
• Amortizations: will you have to pay mandatory amortizations on top?
• Lender: could you live with the financial institution as your contractual partner?

You should be absolutely clear that you will have almost no opportunity to modify these circumstances if the contractual term has not expired. Amending the contract or terminating it prematurely − for instance, leaving the mortgage early at an additional cost (prepayment penalty) − may be options, however. If you terminate the mortgage prematurely, you would need to seek advice about whether this option makes sense for you.

Useful information: if you wish to take over a fixed-rated mortgage from the property’s previous owner, the lender will check you as if you were applying for new financing. In other words, you must meet all the affordability criteria. This includes proving that you have sufficient income to afford the mortgage and the running costs for your property.

When is it worth taking over a mortgage?

Taking over a mortgage is generally worthwhile as a buyer if the old interest rate is lower than the current market interest rate. This way, you will benefit from low monthly fixed costs for the rest of the mortgage term. The downside is that you won’t be able to deduct as many interest costs from your taxes.

However, even if the old interest rate is higher than the current rate, taking over a mortgage may still pay off: as the buyer, you have an excellent argument for negotiating a lower price. You can agree to take on the additional interest costs if the seller compromises on the sales price in return. Remember: the seller is just as interested in the mortgage handover as you are in the house. After all, if nobody takes it over, the seller must pay the lender a prepayment penalty to compensate for the interest lost. Depending on the change in interest environment since the mortgage was taken out, the mortgage amount, the interest rate and the residual term to maturity, this penalty can be very high, potentially amounting to tens of thousands of francs. This penalty may be far more painful for the seller than a price reduction.

However, sometimes sellers lower the price of their own accord if the current market interest is lower than the old interest rate. The following example shows how this can pay off even for them.

Example

The interest you are taking over is lower than the current market price. The seller is compensating these additional costs with a price reduction.

• Original purchase price: CHF 1,200,000
• Price reduction: CHF 24,000
• Mortgage: CHF 600,000
• Old interest rate: 2.3%
• Current interest rate: 1.5%
• Residual term to maturity: 5 years

What does taking over a mortgage mean for taxes?

Two tax types are relevant:

• Income tax for the buyer
• Property gains tax for the seller

Regarding income tax: if the interest rate being taken over is higher than the current market interest rate, this means a tax benefit for the buyer. This allows the buyer to deduct more interest costs than if they were to take out new financing with a lower interest rate. If the old interest rate is lower than the current market interest rate, the reverse is true. Of course, these taxes are just one factor in the overall calculation − and not the most significant.

Regarding property gains tax: anyone selling a property at a profit must pay taxes on it. Property gains are accrued from the difference between the previous purchase price and the current sales price. If sellers reduce the sales price to secure a deal, their profit will decrease, which in turn reduces their tax burden. On the other hand, this means there is no prepayment penalty that they could deduct from the property gains tax. This requires a careful calculation of the pros and cons of taking over a mortgage or terminating the mortgage early. However, the same rule applies again: selling at a lower price pays off in the overall calculation in many cases. Please note: property gains tax can also be deferred if a new property is purchased within a specified period and allowing for the purchase price of the new property.

However, the lower purchase price as a result of taking over the mortgage may have consequences later on for the buyer: if they resell the property at some point, their property gains, and in turn their property gains tax, will be higher.

Good advice on mortgages

Are you unsure whether or not to take over current financing? Our financing experts would be happy to advise you on mortgages. You can arrange your mortgage consultation at your preferred branch with ease using our contact form.

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