Buying a home: for many people, owning a home is a major life goal. Whether you're buying, refinancing or renovating, you need to understand the issues involved. Let's take a look at buying your dream home in Switzerland.
Before buying, you should check the municipal and cantonal tax for the area. Is the property lease or freehold? If leasehold, what is the ground rent? Is the location favourable in terms of sunshine, the view, privacy, etc.? How is the property heated? Is there adequate parking? How close are the train station, bus or tram, schools and shops? Has the property been renovated? Make sure to ask for a copy of the builder's invoice.
Can you afford the property?
Apart from the purchase price and interest payments there are many other one-off expenses involved in buying a home and moving. There are no national standards governing the one-off costs of buying or selling a property, so these may differ widely between cantons. Therefore, you should contact the relevant land registry for detailed information.
Payments are also handled differently in different cantons. However, in most cantons, each party pays half of the costs--notary and land registry fees, and the immovable property transfer tax.
The sales contract
Sales contracts are quite standard and although it seems strange, only one notary acts on behalf of both the vendor and the buyer in Switzerland, and it is generally the vendor who appoints the notary.
The sales contract includes: a description of parties to the contract; property description including easements, charges and mortgages; purchase price and closing date; arrangements for insurance and payments (including dates) for home, property gains tax and other taxes, and collateral/interest in respect of the deposit.
Banks usually approve a loan when the cumulative cost of your mortgage interest, ancillary costs, loan repayments and other loan payments such as second property loans, personal loans or car leasing do not exceed one third of a your gross income. Mortgage lenders calculate a rough figure for these, using a percentage currently between five and seven per cent of the amount you are borrowing. Then they will multiply that figure by three, and compare it to your gross salary to decide if you earn enough money to pay the mortgage loan you are requesting.
Your actual costs may vary somewhat. As an example, here is how that calculation might golf you purchased a house at SFr 1,000,000, put down SFr 200,000 as a deposit and borrowed SFr 800,000. Assuming no other personal loans, your costs would then be SFr 28,000 in mortgage interest (at the current variable rate of 3.5 per cent), a gross annual repayment of SFr 6,365 on principle, and maintenance costs (at 0.7 per cent), equalling SFr 7,000. Your total annual costs for this property would be SFr 41,365.
Multiplied by three, it appears that a minimum income of SFr 124,000 would be required to get the necessary mortgage for this house. To be on the safe side, conservative lenders may calculate SFr 800,000 x seven per cent = SFr 56,000, which would require a gross income of SFr 168,000. The calculation does not allow for tax benefits.
Generally, lenders require a 20 per cent down payment. As well as cash, this can be provided as an advance withdrawal from your company pension or retirement assets from second or third pillar (3a).
Using your pillar 2 retirement assets is an increasingly popular way of purchasing property, but is only permitted if the property is going to be your personal home. You are not permitted to use your retirement assets to buy a second home. However, it does not matter whether you buy as a sole or joint owner, whether you buy a house, an apartment in a larger building or a share in a housing association, or whether you are investing in the property to increase or maintain its value.
If you do choose to withdraw the company pension fund assets, you will have to pay a tax at a reduced rate. If you later sell your home, you must pay the capital you received as an advance withdrawal back into your second pillar pension plan. This payment is not deductible from taxable income. You can, however, reclaim the tax paid (without interest) by proving that you have repaid the sum in question.
If however, you pledge the company pension fund assets as collateral against your mortgage, your savings remain with the pension fund and there is no tax to pay. But the amount you borrow from the lender will obviously be higher which--depending on the mortgage rate and your taxable income--should be considered. You might choose this option, as an example, to receive a 100 per cent mortgage for tax reasons.
Variable or fixed term mortgage
Banks and insurance companies offer many types of mortgage products making it almost impossible for the layperson to feel that they have chosen the best one. Interest rates in Switzerland have also risen of late, making the decision even more difficult.
Confidence in the economy is putting upward pressure on longer-term interest rates, especially for fixed-rate mortgages. Many are turning to variable-rate mortgages for now, speculating that the long-term rates will return to lower levels.
The variable Swiss franc mortgage in Switzerland is currently at 3.5 per cent whereas the five-year fixed rate has increased by 0.5 per cent over the past six months and with most banks exceeds 4.5 per cent. It is important to decide if you want the stability of a fixed-rate mortgage even if it means a higher cost.
It is difficult to predict if the variable mortgages will continue to increase, therefore we find that for peace of mind, most expats opt for a fixed-term mortgage of around five years. The past few years have seen interest rates fall dramatically. Despite the recent rise, the current rates are still historically low.
Banks generally ask that one per cent of the loan principle is repaid annually until the amount of the loan falls to 65 per cent of the property value. Loan interest on property is deductible in Switzerland therefore, depending upon your cantonal and municipal property tax, your taxable income and the rate of tax you pay. It usually makes financial sense not to repay the mortgage below this level.
Alternatively, instead of repaying the mortgage principle directly, you can also make indirect repayments to the lender. This could be through contributions to your pillar 3a pension account, or through a pillar 3a life insurance policy, both of which have the same tax saving advantages. The advantage with the pillar 3a repayment is that if your property value goes up, you may not have to give that money to the bank. But there are different nuances with both methods and higher costs involved with the 3a life insurance policy, so we recommend you discuss your options with a financial advisor.
Hopefully this article has given you a brief idea of what to expect, but we recommend you turn to an expert to negotiations with the vendor and the bank on your behalf. Good luck with the house hunt.
The company, formed in 1997, is authorised and regulated by the Swiss Federal Banking Commission.
For further information please visit www.keyinvestment.ch or write to email@example.com or call 081 257 13 14
Brien Donnellon is the owner of KEY INVESTMENT, a financial services company providing unbiased financial advice and solutions for Swiss-based expats, HR departments and foreign investors.
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|Date:||Aug 1, 2008|
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