Getting credit for your assets: Swiss mortgages and Lombard loans are very popular among expatriates, foreign investors and native Swiss who wish to buy property or start a business. Let's take a closer look at these popular sources of cash.
In fact, the lender holds the title to your house until the debt is completely paid off, and the lender will sell your house in order to get the money back if you can't make your mortgage payments.
Your down payment is the lump sum you pay up front. You can put down as much capital as you want, but 15 to 20 per cent is the minimum amount of security required by Swiss banks for a first property. Capital in a Swiss corporate pension can be used to finance your primary property. Non-Swiss are treated the same as native Swiss but negotiation is a must for everyone!
Your mortgage payment includes principal, the amount of the loan after down-payment and interest, which is what the lender is charging you for the loan. The interest will be a percentage of the total amount of money you are borrowing.
Mortgages can involve a gradual repayment or interest-only payments.
The mortgage is paid off over an agreed period usually in quarterly or yearly payments that gradually reduce the principal of the loan. This is called amortization.
Initially the portion of your payment that goes to pay the interest is much higher than the portion that goes to the principal. A big advantage of a repayment mortgage is that at the end of the mortgage term, most of the debt is repaid.
The interest-only mortgage
With an interest-only mortgage, your monthly payments to the lender only pay the interest charges. The actual mortgage balance--the amount borrowed--does not decline.
This means you must repay the capital part of your loan at the end of the mortgage term. To do this, you put money into a separate investment. This should grow and enable you to pay off the mortgage when required to do so.
Market volatility has recently has put many people off the idea of saving their mortgage repayment through the stock market. Poor performance of the stock market causes investments that are now maturing to under perform.
If the growth assumptions for an investment are conservative, however, there should not be a problem.
An interest-only mortgage is tax efficient in Switzerland because the interest is deductible. A tax efficient way of indirectly repaying the mortgage is to invest in a pillar 3A bank account, which is pledged to the mortgage lender--usually the same bank as provides the 3A account.
Negotiate your rate
Many interest-payment plans are available, including variable interest, fixed-rate, money market, Libor and adjustable rate. These mortgage products are very similar although each bank often has their own product name.
The interest rates are negotiable and negotiated discounts of between 0.1 per cent and 0.6 per cent can be shaved off the banks' published mortgage rates. The discount will depend on the borrower's situation, property and location, not to mention--of course--their negotiating skill!
The first half of 2007 has seen the variable residential mortgage rate hover around 3 per cent per annum for residential mortgages--therefore about 2.4 per cent net in most cases.
We expect mortgage rates to rise, although slowly, and we therefore recommend that a borrower negotiate a fixed rate for the next few years.
Assets on deposit in a bank--such as equities, bonds and life insurance policies--are held in safekeeping and can be readily borrowed against with the assets as collateral.
This is called a Lombard loan, and it can be an ideal way to cover financial shortages without having to dispose of the investments.
It is often used to bridge personal or business financial shortfalls.
And its capital can be transferred globally within just a few days, so it therefore remains a good option for a purchase of property abroad.
So the Lombard loan is a credit designed to cover liquidity requirements by pledging your account balance and/or your securities in safekeeping.
The amount will equate to a percentage of the market value of the assets, depending on the type, currency, quality and tradability of the securities. For example, for a portfolio of mutual funds, a bank will lend you around 60 per cent of the portfolio value.
The composition of your safekeeping account also plays a role determining the amount you can borrow. If the value of the assets held in your safekeeping account drops significantly, you must provide additional liquid assets or reduce the loan accordingly.
This can cause major problems if the investor used the Lombard to purchase additional equity investments. This is known as leverage. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would have otherwise been. Leverage magnifies both gains and losses.
Lombard loans are available in the form of a lump sum and like a mortgage you can fix the interest rate for an agreed period. The minimum credit limit is around SFr 100,000.
But you can also secure a current account loan, which works like a conventional credit line. In this case you pay interest only on the amount of credit that is actually used, and a commission is often charged in addition to interest. The minimum credit limit is around SFr 30,000.
Summary of a Lombard loan:
* You profit from the return on your securities, yet also have additional capital at your disposal.
* You continue to receive the dividends and interest income generated by your assets held in safekeeping.
* You can undertake portfolio adjustments as you wish; the loan-to-value ratio will be modified accordingly.
* You can request a Lombard loan in Swiss francs or in a major foreign currency.
* In most Swiss Cantons the interest paid can be deducted to optimise your tax burden.
A short guide to purchasing property in Switzerland
Applying for a mortgage: We recommend you arrange a mortgage in principle before searching for a property. This will enable you to find out how much you can borrow.
Income tax: Before your house search begins, check the level of tax for your chosen canton and also at local level. The cost of property is generally higher where the tax is lower but enormous savings can be made. Zug, Obwalden, Nidwalden and Schwyz are considered low tax areas.
Legal issues: Consider federal, cantonal and local laws. We recommend you don't sign anything until you seek legal advice and never put down a deposit before checking that it is refundable. You should also check into legal costs and government taxes.
Completion: In most cases a notary will act on behalf of the lender, the purchaser and the vendor to complete the purchase. Set up fees: Swiss bank fees vary but you should expect to pay between SFr 300 and SFr 500, negotiable. Change of ownership fees and notary fees also vary but can be five per cent of the purchase price.
Level of lending: There are two main criteria in determining your maximum loan: the value of the property and your financial situation. Most Swiss lenders take into account your existing liabilities including mortgage/rent payments, personal and bank loans, and maintenance payments. When these are added to your proposed Swiss mortgage payments, the total should not exceed one third of your gross income.
Insurance: Building insurance is compulsory and differs depending on the canton. Not all lenders require life coverage.
Next month: Making a mortgage work for you
Brien Donnellon is the owner of KEY INVESTMENT, a financial services company providing unbiased financial advice and solutions for Swiss-based expats and HR departments. The company, formed in 1997, is authorised and regulated by the Swiss Federal Banking Commission. If you have further questions please visit www.keyinvestment.ch or write to firstname.lastname@example.org or call 081 2571314.
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|Date:||Jun 1, 2007|
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