Example 1: Buying an Apartment in the Canton of Zurich
Buyers: Family with CHF 200,000 gross household income and CHF 500,000 in cash.
|
Maximum purchase price: |
CHF 1,565,966 |
|
of which cash (31.8%): |
CHF 497,651 |
|
of which mortgage (68.2%): |
CHF 1,068,315 |
|
of which purchase-related costs: |
CHF 2,349 (0,15% in Zurich) |
Purchase price limited by: income
Example 2: Buying an Apartment in the Canton of St. Gallen
Buyers: Family with CHF 170,000 gross household income and CHF 200,000 in cash.
|
Maximum purchase price: |
CHF 934,580 |
|
of which cash (20%): |
CHF 186,916 |
|
of which mortgage (80%): |
CHF 1,068,315 |
|
of which purchase-related costs: |
CHF 13,084 (1.4% in St. Gallen) |
Purchase price limited by: cash
Affordability and mortgage eligibility when purchasing a home in Switzerland
Switzerland has some of the most stringent and restrictive mortgage approval criteria in the world. Coupled with high real estate prices, this poses a big entry threshold to prospective homeowners, as you need a significant amount of both income and cash. This, along with the high population density and healthy rental market, is in fact one of the reasons why Switzerland has such a low homeownership rate by international standards.
It's crucial to understand that general affordability criteria are set by law; there is only limited room for negotiation. If your income is too low, banks have no choice – they are forbidden from granting you a mortgage. Nevertheless, financial institutions have some leeway in assessing your income, assets, and the property itself.
This means that even if one bank has rejected your application, your mortgage may very well be approved by another. Therefore, it's paramount to not only approach a single lender but to explore the entire market. A financial advisor with their network of banks and insurance providers is the easiest way to gain access to all the various offerings in the market.
Collateral value and maximum mortgage amount in Switzerland
By law, banks in Switzerland are allowed to mortgage a property up to 80%. The so-called lower of cost or market principle applies, meaning that the collateral value corresponds to either the purchase price or the fair market value, whichever is lower. If you buy a property above its market value, you have to pay the difference with additional cash.
Just like the affordability criteria, the loan-to-value ratio is set by law, but financial institutions have some room for interpretation. A lot again depends on how the bank or insurance company values the property. Therefore, it is advisable to start the financing process early. Consult with a financial advisor as soon as a property makes it to your shortlist, and have them appraise the property. The maximum mortgage amount will be approximately equal to 80% of the property value.
How much is needed in savings to buy a home in Switzerland?
Since a mortgage can amount to a maximum of 80% of the price, as a buyer, you must pay at least 20% of the purchase price upfront. Within the Swiss legal framework about homeownership (Accession à la propriété du logement/Wohneigentumsförderung), it is possible to withdraw up to 10% of the purchase price from occupational pension funds (2nd pillar). It is important to note that until retirement, the portion of the mortgage exceeding ⅔ or approximately 66% of the property's value must be amortised, meaning it must be repaid. This serves to mitigate the bank’s risk, as the income of the mortgage borrower typically decreases significantly upon retirement.
Naturally, it is also possible to pay more than 20% of the purchase price from your own funds if you can afford to do so. This affects your affordability: With a larger share of cash, your mortgage interest decreases as the required loan will be smaller. Additionally, mandatory amortisation payments decrease, as you only need to redeem the portion of the mortgage that exceeds 2/3 of the property value.
However, going for a smaller loan may not be in your best interest. This is because somewhat counterintuitively, owning a higher share of your property actually increases your tax burden, as the interest expenses and mortgage debt can be deducted from taxable income and wealth, respectively. This has the perplexing consequence that in Switzerland, unlike in most other countries, redeeming your mortgage beyond ⅔ of the property value is neither required nor is it common. It’s advisable to discuss this with your financial advisor prior to the purchase.
How much income do you need to buy a house?
In addition to the purchase price, which is primarily limited by your cash, ongoing costs are the second major criterion in mortgage approval. In Switzerland, this is called the affordability of a mortgage (Tragbarkeit/Capacité d’achat). When calculating your affordability, the expected ongoing costs are compared to your income. This ensures that your property remains affordable in the long term. As a simple rule of thumb, the ongoing costs of owning a home should not exceed one-third of your gross income.
Ownership costs have three main components. The percentage figures below correspond to typical values used by financial institutions (all values per year):
- Mortgage interest (imputed interest rate of 5%)
- Amortisation (approximately 1% of the mortgage)
- Maintenance and ancillary costs (approximately 1% of the property value)
To hedge against the risk of rising interest rates, financial institutions do not use the actual mortgage interest rates but rather a hypothetical interest rate of 5%, which is significantly above long-term average interest rates.
One-time costs when buying a home in Switzerland
Additional costs must be paid in cash
Apart from the obvious financial burden posed by the purchase price and mortgage, several one-time costs are incurred when buying a home in Switzerland. These costs include property transfer tax, notary fees, land registry fees, fees for the mortgage note, and property gain tax. The costs vary significantly depending on the canton.
It's important to keep in mind that purchase-related costs must be paid in cash. This means that, in practice, you need slightly more funds than just 20% of the purchase price.
Property transfer tax
Property transfer tax (Handänderungssteuer/Droit de mutation) is levied on the transfer of ownership of a property to a new owner. The tax rate varies depending on the canton, typically ranging from 1 to 3% of the purchase price. Some cantons reserve the right to tax the fair market value instead if the transfer is made at a price below market value.
The property transfer tax is paid either by the buyer or by both the buyer and the seller. In most cantons, the tax is divided equally between the buyer and the seller, with both parties jointly responsible. In the cantons of Zurich, Uri, Glarus, Zug, Schaffhausen, Aargau, and Ticino, there is no property transfer tax in the traditional sense.
In most cantons, property transfers between spouses and descendants are tax-exempt or subject to lower taxation. Property transfer tax is also waived in many cantons for gifts and inheritance.
Notary fees
In Switzerland, any property transfer involving real estate must be publicly notarised. This means that a purchase agreement is only valid when it is authenticated by a notary.
For the notarisation of the purchase agreement, notary fees are incurred. These fees are either a percentage of the purchase price (typically around 0.1 to 0.5%, depending on the canton), or they are based on the time and effort expended. Usually, the notary costs are split equally between the parties involved.
Land Registry fees
To complete a property transfer, the new owner of the property must be entered into the land registry. Land registry offices charge a fee for this service. In most cantons, this fee amounts to between 0.1% and 0.2% of the purchase price. Usually, the land registry fees are divided equally between the parties involved.
Please note that the 0.1% to 0.2% mentioned here are specifically fees for the land registry entry. In cantons where the land registry office also acts as a public notary by authenticating the purchase agreement, additional fees may apply for these services.
Fees for the mortgage note
For you to be able to close a mortgage deal with your lender, you need a mortgage note. The mortgage note (Schuldbrief/Cédule hypothécaire) is a specific type of entry in the land registry (commonly referred to as a lien in English) which grants the lender the right of foreclosure in case of a default.
This costs approximately 0.1 to 0.3 percent of the mortgage. Naturally, you as the borrower are responsible for paying these costs.
Broker’s commission
According to Swiss law, a real estate broker is generally expected to act on behalf of and in the interest of the seller, who is therefore solely responsible for paying the broker’s commission.
There are exceptions, such as if you have hired the broker as a buyer, and a contract was signed for this purpose. If a broker acts on behalf of both parties, they may only charge a commission from both parties if they have been informed and have consented.
It’s recommended that you inquire whether a commission is due upon purchase should your dream property be sold by a broker.
Property gains tax
When selling a property in Switzerland, the property gains tax (Grundstückgewinnsteuer/Impôt sur les gains immobiliers) is due. This tax is levied on the profit, that is, the difference between the selling price and the acquisition costs. Value-enhancing investments, as well as additional costs (notary fees, broker commissions, etc.), can be deducted from the profit. This tax is payable by the seller.
However, caution is advisable for buyers: If the seller fails to pay the property gain tax, the new owner of the property can be held liable. Therefore, it is crucial that the payment of property gain tax be explicitly mentioned in the purchase agreement.
Buying a home on a tight budget
Are you planning to become a homeowner? Perhaps you already have a few properties on your shortlist but are still unsure about what maximum purchase price you can actually afford.
By consulting with a financial advisor, you will maximise your financial resources. At Strike, our experienced advisors provide personalised advice on all financial matters related to your real estate purchase and beyond. Your personal advisor will analyse your income, assets, and retirement situation to find the right mortgage and insurance solutions for you from our network of over 80 partners.
The Strike team is ready to assist you in turning your real estate purchase into reality. Make your purchase a success with Strike just like hundreds of satisfied customers before you!
