HOW A MORTGAGE WORKS
A mortgage is a long-term loan taken out to finance a property with a view to becoming the owner. The loan is granted by a financial institution, which uses the property as security to protect it from the risk of the loan not being repaid.
To calculate the cost of a mortgage, both the interest on the debt and repayment of part of the loan amount need to be taken into account.
We can identify the best option for you depending on your situation: fixed interest rates over specific periods, or variable interest rates that track the Libor rate.
You need to cover at least 20% of the purchase price with your own funds, of which a minimum of 10% must come from savings other than your 2nd pillar.
Your contribution can be a combination of:
- your personal savings (min.10%),
- your 2nd pillar,
- your 3rd pillar,
- a donation from a third party,
- or from a property that you already own.
As well as the price of the property itself, the purchase involves several other costs (legal fees, land registration, transfer of rights), which amount to 3% to 5% of the value of the property. These fees vary from one canton to the next and are not included in the financing calculation, but it is important to factor them into your purchase plan and have the additional funds you may need to cover them.
In general, banks require you to make a minimum contribution of 20%. In most cases, a mortgage can be broken down as follows, in terms of percentage of the value of the property:
The contribution can came from personal savings (savings account, 3rd pillar), at a minimum of 10% of the purchase price, and the 2nd pillar.
1st and 2nd mortgage:
For greater security, the mortgage is divided into two parts, called the 1st and 2nd mortgage. 65% of the purchase value is covered by the 1st, and 15% by the 2nd.
The repayment period is shorter for the 2nd, which must be paid off within a maximum of 15 years and, in all cases, before the borrower reaches the age of 65. The interest rates for the 2nd mortgage are also higher.
However, in practice this option is increasingly being replaced by a flat rate for both mortgages. Depending on the size of your own funds and guarantees, it is possible to obtain a mortgage that includes only the first part.
In practice, approval for a mortgage is based on 3 main criteria:
as valued by the bank
of the borrower
When calculating the borrowing capacity, the bank also includes a hypothetical 5% interest rate in their equation to cover any potential increase in interest rates and thereby ensure the security of the borrower. Ultimately, it is the rate chosen by the borrower that is applied.
For the mortgage to be accepted, the mortgage repayments must not exceed one third of the borrower's gross annual income, i.e. a maximum of 33% of gross annual income.
A household with a gross annual income of CHF 195,000 would like to purchase an apartment with a value of CHF 1,000,000.
They can contribute CHF 200,000 of their own funds, CHF 100,000 of which would come from their 2nd pillar and CHF 100,000 of which would come from their savings accounts and their 3rd pillar.
Are their own funds and income sufficient?
Calculation of annual expenses in CHF
Example mortgage calculation:
Taking into account the total annual payments related to the mortgage, the household's gross annual income must be at least CHF 194,545 to be able to pay off the loan.
With a gross annual income of CHF 195,000 and own funds amounting to 20%, the mortgage can be approved.