The mortgage

1 What is a mortgage?

A mortgage is a common means of financing real estate purchases or construction under Swiss law. It is a form of loan security in which the loan is secured by the property to be financed. The mortgage is a mortgage lien and is enshrined in the Swiss Civil Code. It must be entered in the land register, which is maintained by cantonal land registries, in order to be established.

If a borrower takes out a mortgage, this means that in return for the funds provided, they pay interest to the bank and undertake to repay the loan in accordance with set conditions. In return, the lender, often a bank or other financial institution, receives the right to sell the property if the borrower becomes insolvent and to use the proceeds to cover its claim. The mortgage is therefore an instrument that offers advantages to both parties: The buyer can purchase a property without having to put up the full purchase price immediately, and the bank receives a high level of security through the mortgage, which is why mortgages are generally offered at more favorable interest rates than unsecured loans.

To take out a mortgage, the borrower’s creditworthiness is checked. Income and the value of the property play a decisive role here. Another important point is the affordability of the mortgage. According to the standard of Swiss banks, the monthly burden of the mortgage – i.e. interest, amortization (repayment) and maintenance – should not exceed 1/3 or 33% of the borrower’s gross income. This means that the annual costs for interest, amortization and maintenance should not exceed one third of the gross income. In addition, an equity ratio of at least 20% of the purchase price is required to ensure solid financing. The borrower should therefore be able to contribute at least 1/5 of the purchase price from their own assets.

2 Mortgage and pension provision: How much mortgage makes sense at what age?

The question of how much mortgage you should take out is closely linked to your personal stage in life and your financial goals. Pension provision also plays an important role, as financial planning for the future is crucial. The following section explains what in particular needs to be considered at different stages of life:

a) Young employees (approx. 25-40 years)

In the early years of their careers, many people have comparatively little equity. It is not unusual for young employees to take out a higher mortgage as they are at the beginning of their career and still have many years ahead of them to amortize the debt. Mortgage interest is tax-deductible, which can be particularly advantageous if the loan amount is higher. However, the affordability of the mortgage should always be guaranteed.

It is also possible to use assets from the second pillar (BVG) or pillar 3a as own funds if necessary. However, it should be borne in mind that an excessive reduction in pension assets can lead to a later shortfall in old age. A balanced relationship between mortgage and pension capital is therefore particularly important at a young age.

b) Middle employment phase (approx. 40-55 years)

In midlife, most people’s professional and financial situation stabilizes. In this phase, it is often recommended to gradually reduce the mortgage amount in order to reduce the debt burden and keep the financial burden low in retirement. It is often recommended to have paid off around a third of the mortgage by the time you retire.

As income usually peaks during this phase, it is an ideal time to reduce mortgage debt and make provisions for old age. Even in this phase, however, long-term financial goals should always be kept in mind, particularly with regard to retirement provision.

c) Before retirement (from approx. 55 years and older)

The closer you get to retirement, the more important the question of whether the mortgage remains affordable becomes. Many people have a lower income in retirement, but their housing costs remain the same. This limits the ability to pay interest and amortization. It is therefore recommended to pay off a significant portion of the mortgage by the time you retire. Alternatively, a fixed-rate mortgage with fixed interest payments can be taken out to facilitate financial planning in old age.

A mortgage that is too high can quickly become a considerable burden when you reach retirement age. At this stage, it is advisable to carefully examine the financial sustainability and, if necessary, take measures to further reduce the mortgage.

3. how do you take out a new mortgage when your own funds are tight?

The real estate market in Switzerland is expensive, and it can be a challenge to obtain a mortgage with limited equity. Nevertheless, there are various ways to achieve this:

1. Use of pension assets:
   In Switzerland, it is possible to use funds from the second pillar (BVG) and pillar 3a for the purchase of residential property. These funds can either be withdrawn in advance or pledged in order to achieve the required equity of 20% of the purchase price. It should be noted that at least 10% must come from non-pensionable sources.
2. Additional collateral:
   If equity is scarce, it may be possible to offer the bank additional collateral, such as additional real estate or guarantees from third parties (e.g. family members). This may prompt the bank to grant a higher mortgage.
3. Second mortgage:
   Some banks offer the option of taking out a second mortgage. However, this is more expensive and usually has to be fully amortized within 15 years. Here too, the affordability requirements are stricter.
4. Term life insurance:
   Term life insurance can also be an option to secure the mortgage. It protects the bank and gives the heirs or survivors financial security if the mortgage debtor dies unexpectedly. You can find out more about term life insurance and life insurance in general here.

In any case, it is important to keep an eye on the affordability of the mortgage and not take on more debt than can be financed in the long term.

4 Mortgage and inheritance: Are mortgages inherited?

In the event of the death of a mortgage debtor, the question arises as to what happens to the current mortgage. In principle, debts, including mortgages, are inherited as part of the succession. The heirs assume the rights and obligations of the deceased and thus also assume the mortgage obligations (universal succession). This means that they must continue to make the interest and amortization payments.

The heirs have the option of waiving the inheritance if they do not wish to assume the mortgage burden or if the debts exceed the value of the inheritance.

If the heirs wish to take over the property and thus also the mortgage, but this is not affordable, it may be sensible to negotiate an adjustment to the mortgage with the bank. This could involve extending the term or changing the amortization structure, for example. The bank will usually check whether the heirs have the necessary creditworthiness and affordability for the mortgage.

Summary

The decision to take out a mortgage requires thorough financial planning and foresight. The amount of the mortgage should always be in balance with your income and stage of life. Even if you have limited own funds, there are still various options for obtaining a mortgage, but the focus should always be on long-term financial sustainability. In addition, mortgages can also play a role in the event of inheritance due to universal succession, and it is advisable to think through possible scenarios at an early stage.

You might also be interested in:

• Inheriting real estate – What testators should regulate
• What does estate planning involve?
• How are the compulsory portions calculated?