The loan-to-value ratio, also known as the loan-to-value rate, refers to the ratio of the mortgage to the collateral value of the property. But what is the collateral value, and how high can the maximum loan-to-value ratio be? Find out more about this here.
Few people have sufficient funds of their own to pay for a home in one go. For this reason, they borrow external funds in the form of a mortgage. The external funding share of the collateral value is called the loan-to-value ratio or loan-to-value rate (in percent). The resulting external funding total is the mortgage (in Swiss francs).
The term “collateral value” has been used several times now. What is that exactly? The collateral value is the total value of the property, which the lender uses as the basis for calculating the mortgage.
Two values are considered when calculating the collateral value: the market value and the purchase price. One is determined by means of a property valuation, the other is the actual price to be paid that the buyer and seller have negotiated. The two values can be the same, but they don’t have to be.
The value actually used for the collateral value depends on which of these three scenarios applies in the given case:
In scenarios 2 and 3, the lower of cost or market value principle is applied. This specifies that the lower of the market value and the purchase price is considered the collateral value.
| Value | Scenario 1 | Scenario 2 | Scenario 3 |
|---|---|---|---|
| Value Market value |
Scenario 1 CHF 800,000 |
Scenario 2 CHF 800,000 |
Scenario 3 CHF 800,000 |
| Value Purchase price |
Scenario 1 CHF 800,000 |
Scenario 2 CHF 780,000 |
Scenario 3 CHF 830,000 |
| Value Collateral value |
Scenario 1 CHF 800,000 |
Scenario 2 CHF 780,000 |
Scenario 3 CHF 800,000 |
| Value Maximum external funding |
Scenario 1 CHF 640,000 (80% of CHF 800,000) |
Scenario 2 CHF 640,000 (80% of CHF 800,000) |
Scenario 3 CHF 640,000 (80% of CHF 800,000) |
| Value Required equity capital |
Scenario 1 CHF 160,000 |
Scenario 2 CHF 156,000 |
Scenario 3 CHF 190,000 |
In scenario 3, it is clear how the lower of cost or market value principle can become a problem for a buyer. If the effective price is above the market value, the buyer must raise more than 20 percent of the price from their own funds. In this case, the lender contributes only 80 percent of the (lower) market value and not 80 percent of the effective price. The buyer must close this financing gap with their own money.
According to the “Guidelines regarding minimum requirements for mortgage financing” issued by the Swiss Bankers Association (Swiss Banking), a buyer should contribute at least 10 percent of their own funds when purchasing an owner-occupied residential property. This 10 percent must not include any money from the pension fund. Conversely, this means that the collateral value can be a maximum of 90 percent. In practice, however, a financing with a loan-to-value ratio of over 80 percent is generally not granted unless there is additional security, such as in the form of pledged retirement assets.
In addition to a minimum equity ratio of 20 percent, affordability is the most important requirement for a mortgage. To assess whether a customer meets the affordability requirements, financial institutions perform the following calculation:
Interest (5% of the mortgage) + amortization + additional costs (1% of the market value) ≤ 1/3 of gross income
The loan-to-value ratio influences two factors in the affordability calculation: interest and amortization. The loan-to-value ratio affects the mortgage interest only indirectly, via the collateral value and the resulting mortgage amount.
| Loan-to-value ratio | Collateral value | Mortgage | Imputed interest/year (5%) |
|---|---|---|---|
| Loan-to-value ratio 80% |
Collateral value CHF 800,000 |
Mortgage CHF 640,000 |
Imputed interest/year (5%) CHF 32,000 |
| Loan-to-value ratio 80% |
Collateral value CHF 1,000,000 |
Mortgage CHF 800,000 |
Imputed interest/year (5%) CHF 40,000 |
| Loan-to-value ratio 75% |
Collateral value CHF 800,000 |
Mortgage CHF 600,000 |
Imputed interest/year (5%) CHF 30,000 |
| Loan-to-value ratio 75% |
Collateral value CHF 1,000,000 |
Mortgage CHF 750,000 |
Imputed interest/year (5%) CHF 37,500 |
The loan-to-value ratio directly influences amortization. The reason: Swiss Banking’s self-regulation guidelines require that the second mortgage must be repaid within 15 years and by retirement at the latest. The second mortgage is the part of the mortgage that exceeds two thirds (around 67 percent) of the collateral value. It can be around 13 percent at most.
| Amortization | Collateral value CHF 800,000, loan-to-value ratio 80% | Collateral value CHF 800,000, loan-to-value ratio 70% |
|---|---|---|
| Amortization Mortgage total |
Collateral value CHF 800,000, loan-to-value ratio 80% CHF 640,000 (80% of CHF 800,000) |
Collateral value CHF 800,000, loan-to-value ratio 70% CHF 560,000 (70% of CHF 800,000) |
| Amortization First mortgage |
Collateral value CHF 800,000, loan-to-value ratio 80% CHF 536,000 (67% of CHF 800,000) |
Collateral value CHF 800,000, loan-to-value ratio 70% CHF 536,000 (67% of CHF 800,000) |
| Amortization Second mortgage |
Collateral value CHF 800,000, loan-to-value ratio 80% CHF 104,000 (13% of CHF 800,000) |
Collateral value CHF 800,000, loan-to-value ratio 70% CHF 24,000 (3% of CHF 800,000) |
| Amortization Yearly amortization |
Collateral value CHF 800,000, loan-to-value ratio 80% CHF 6,933 (CHF 104,000 / 15 years) |
Collateral value CHF 800,000, loan-to-value ratio 70% CHF 1,600 (CHF 24,000 / 15 years) |
The loan-to-value ratio determines whether more, fewer or no repayments are required, which directly impacts affordability. For example, if the loan-to-value ratio is two thirds from the start, no amortization is necessary.
Let’s say you’ve just found your dream home. The market value and price are 1,000,000 Swiss francs. But you have only 150,000 Swiss francs in savings, which would result in a loan-to-value ratio that was too high:
What can you do to make financing possible? In theory, there are two options:
Let’s take a closer look at the two options using examples:
The question here is how much the collateral value (in this case, the price) would have to be reduced so that the existing equity would be 20 percent.
So you would have to negotiate the price down from 1,000,000 Swiss francs to 750,000 Swiss francs to make financing possible. A tall order. The second option may have more chance of success.
In our example, an additional 50,000 Swiss francs in additional equity would be required in order to save the financing:
Check whether there are sources of equity that you have not yet accessed. For example, it is possible to make an anticipated withdrawal or pledge your pension fund or pillar 3a fixed pension plan. Early inheritance or gifts within the family could also help close the gap.
Check whether there are sources of equity that you have not yet accessed. For example, it is possible to make an anticipated withdrawal or pledge your pension fund or pillar 3a fixed pension plan. Advances against inheritance or gifts within the family could also help close the gap.
If you have any further questions about the loan-to-value ratio or other financing-related topics, please contact our experts. Advice is free of charge and non-binding.
At the beginning, it can be 80 percent of the collateral value. After 15 years or at the latest when the mortgage holder retires, it must have been reduced to two thirds of the collateral value.
The financing of investment properties is more strictly regulated than for owner-occupied properties: the maximum loan-to-value ratio is 75 percent and it must be reduced to two thirds of the collateral value within 10 years.
The loan-to-value ratio is a relative value (external funds:collateral value as a percentage), and the mortgage is an absolute value (in Swiss francs).
