When parents hand over their house or apartment to the next generation, there are lots of things to consider – is gifting property a good option? What happens to the mortgage? Is it better to cancel it or take it over? When it comes to a financing solution and right of residence, clear steps should be taken and well-thought-out decisions made at the earliest possible stage. We explain exactly what needs to be done.
Every situation is different, and the key legal and financial factors vary depending on whether an existing mortgage, a new financing solution, a gift or the sale of the property is involved. While that may sound a bit complex, we make everything much clearer by providing a few key definitions and some sound advice. Our article aims to clear up any questions you might have, making it easier for you to make a personal decision.
Taking ownership of your parents’ property as their child – at a very favourable time and while your parents are still alive – has lots of benefits. In this scenario, you, as their child, protect your parents from losing their home due to suddenly finding themselves unable to pay the mortgage or a cruel twist of fate. They can also continue living in their home under a right-of-residence or right-of-use agreement.
The earlier a gift is made, the lower the amount of gift tax levied. The key factor in the tax calculation is the property’s value, and a right-of-use or life-long right-of-residence agreement can help to lighten the burden. The difference between right of use and right of residence is explained further on in this article and in our blog post about easements.
If the children take over the property and the financial aspects involved, this raises the question as to whether a new mortgage agreement must be concluded in the event that the property is sold. There’s no single answer to that question, as lots of factors are involved.
A mortgage is generally tied to a property (whether that’s a fixed-rate mortgage or another kind), as it’s used to finance the property and is entered in the land register. This means it can be viewed by the public.
If the right-of-use option is used, the parents usually remain the borrowers. As beneficial users, the parents continue to cover interest costs. If requested by the customer or depending on the initial financing situation, a new mortgage agreement may be required under which the children as the property owners also become the borrowers.
If a different person becomes the borrower under the change of ownership, the buyer or the children (as the party receiving the gift) must decide whether to take over an existing mortgage or take out a new one. It’s advisable to consult an expert, as this can affect your tax situation.
In the event of a purchase, the mortgage has to be changed, whether it’s being taken over or amended. Premature withdrawal is also an option.
The requirements for transfer of a mortgage are straightforward – financial viability must be ensured. That means the lending financial institution, which provided the mortgage to buy the property, must approve a transfer and assesses whether the new owners are solvent and have the financial means to pay off the existing mortgage.
As the mortgage is linked to specific persons and a particular property, new conditions must be agreed, which gives the children and parents some leeway over the terms of payment. These new terms often result in benefits for both parties.
However, if you don’t wish to take over the mortgage and would prefer to withdraw from the existing contract, a penalty has to be paid for cancelling the mortgage deal. That’s known as a prepayment penalty.
This is calculated based on the term remaining and the potential interest payable under the mortgage contract. So prepayment is an option, but may incur costs depending on how the market has changed since the mortgage was taken out.
The parents can generally decide for themselves – provided the recipient is the legal heir.
If the recipient isn’t the heir under Swiss law, then the only option is a gift.
If a home is transferred, the parties have the following options for acceptance of the mortgage and the property itself:
Gifting during their lifetime means the bequeathing party (the parents) can share their assets with their heirs before they die. It’s important to note that if several people are entitled to inheritance, they must all benefit equally – which is complex when it comes to real estate.
The legal obligation to pay compensation must be complied with and mandatory share-of-inheritance requirements met. If there’s any doubt, any disadvantaged parties must be compensated at a later stage.
The right of residence option gives the parents the right to continue living in the house or apartment for the rest of their lives, but they are not permitted to rent it out.
Right of use entitles the parents to live in the property for the rest of their lives and also allows them to rent it out.
As regards advancement of inheritance, this is a special case under Swiss law. The property is transferred to the heir in the form of a free gift. The inheritance is brought forward while the parents are still alive.
However, under the advancement of inheritance option, the inheritance must be shared amongst the heirs.
It is mainly used to ensure equal treatment and fair distribution amongst one or more heirs after the death of the bequeathing party.
A mixed gift differs from a “pure” one, as the bequeathing party is required to provide some kind of consideration or benefit under the mixed option.
This benefit may take different forms and must be carefully negotiated and set out in writing.
Under this option, the parents pay for maintenance and running costs, as well as tax on the rental value, while the children pay the mortgage and insurance, including taxes. It is possible to transfer the mortgage on the property or select an option for continuing with the existing one.
When it comes to inheritance, there are various options for ensuring the property that’s part of the estate remains in family ownership.
If the person to whom the property belongs according to the land register wishes to sell their parents’ property, a pre-emptive right agreement can be made to enable another heir to claim the property for themselves before it can be sold to a third party. This gives heirs preferential treatment if the property is sold.
A right of redemption must be entered in the land register. This gives the selling party the right to repurchase the property for a maximum period of 25 years.
A profit-sharing agreement can also be made to ensure that if the property is sold by the owner (the person who inherited the property), the other entitled heirs receive a share of the profit from the sale of the home.
Our mortgage experts would be pleased to advise you on the best option at a PostFinance branch. Arrange an appointment directly in e-finance or via the online calendar.
The mortgage is inherited with the property. This means that if someone inherits a property or real estate after a death, the mortgage and payment obligations associated with it are inherited, too.
That depends on a person’s individual situation and the family’s circumstances. Consulting a mortgage expert is strongly recommended before making a decision.
The will of the bequeathing party must be consulted if such situations arise. There’s no universally applicable solution, but interest rate comparisons, market research and mediation may help to find the best options for your family.
