With these explanations of key specialist terms from the world of home financing you will be better able to understand your financial advisor.
Affordability calculations are used to check to what extent someone can, at their current level of income, cover recurring property expenses. A rule of thumb states that the annual recurring expenses (interest, amortisation and incidental/maintenance costs) should not amount to more than one-third of the net income.
Repayment of a mortgage in instalments. Generally, a home loan is to be paid off to two-thirds of the collateral value within 15 years. The instalments are paid annually, and either directly or indirectly. Indirectly means there is no repayment of the mortgage principle but instead a payment into a Pillar 3a account at the bank. The bank holds these funds as collateral. This alternative has tax advantages. The repayment is only made later when the Pillar 3a product is cashed out, generally upon retirement. It is also possible to use life insurance policies for indirect Amortisation.
Determination of the value of a piece of real estate by using a system (a hedonic assessment) or an expert (standard assessment). An assessment helps considerably to determine a property’s market value. One is conducted in the case of an upcoming purchase/sale, when a mortgage is issued, for an estate distribution or gifting an inheritance in advance, in disagreements dealing with assets or estates, in marital separations/divorces, and when issuing a right of residence or usufructuary rights.
Bank and bank comparison
In Switzerland, banks are by far the most important issuers of mortgage loans. Mortgages operate according to what is called the interest-rate margin business. In other words, the bank on the one hand receives savings deposits from clients and pays them a certain amount of interest for its use. On the other hand, it loans money to private clients and companies which is used, for example, to build a home. Every bank is familiar with its own business and loan policies and sets up its own conditions for credit Transactions.
True, all banks are subject to certain uniform standards and laws, and the Swiss Financial Market Supervisory Authority FINMA monitors their observance. Otherwise, banks are free to set up their business, contractual conditions and customer relationships in any way they see fit. A client is thus well advised not to simply turn to the nearest credit institution. The best approach is to arrange for a meeting with several banks, get expert advice, solicit offers and then compare them.
Loan with a short term which serves to cover a financial gap. Thus, people sometimes refer to a bridge loan. It is issued in special cases, such as if a borrower purchases a new home before he has sold his previous home and has paid off the remaining mortgage on it.
Craftsmen and companies have a legal right of lien for their work and delivered materials as well as for items such as excavated material, sanitary systems, electrical work, demolition, scaffolding and much more. As long as claims from participating companies and craftsmen have not been paid, those parties can request a lien for the affected property to be entered into the land register (at the latest, four months after the work has been completed). In an extreme case, the property would be subject to a compulsory auction so that the claims of craftsmen can be paid from the proceeds. Any property owner who has something built or renovated must therefore make absolutely sure all payments are made properly.
Building on leasehold property
With this alternative, you purchase only the building without the land or the corresponding portion of land, such as with a unit in a condominium complex. This of course has the advantage of a lower purchase price – there is no need to acquire the ground, which in good locations can be very expensive. For the use of the ground, you pay its owner or the freeholder a fee which is known as ground rent. Leasehold agreements are concluded with a term of from 30 to 100 years.
Beware: ground rent is often structured in a complicated way and it increases over time because it is indexed to interest rates or inflation. Recommendation: get expert advice before you sign a leasehold agreement.
This concerns a variable-rate loan for which a certain upper limit to the interest rate (the cap) may not be exceeded. In other words, if the market interest rate increases above the upper limit (e.g. 5 per cent) to 5.5 per cent, the borrower continues to pay only 5 per cent. On the other hand, if the market interest rate drops, the client benefits. However, the bank requires a premium for this additional upwards hedge, and it is generally already included in the current interest rate for the loan.
Mortgages and construction loans are secured with real estate liens (mortgage note, mortgage assignment). It might be advisable in certain cases to have additional collateral, for instance such as a Pillar 2 or 3 account, term life insurance or traditional life insurance to protect your family.
Banks use this term to describe the value of the assets securing a loan. They include real estate (buildings, pieces of property) plus stocks and bonds. The collateral value expresses the probable amount at which those assets can be cashed out at any time, even over the long term. For owner-occupied residential property, the collateral value is generally roughly 80 per cent of the purchase price. Under these conditions, a bank is prepared to finance 80 per cent of the value with a mortgage. To the extent the property’s quality is reduced, such as through the aging of a building, the bank can reduce the collateral value or set it at a lower amount from the very start.
Loan-to-value ratios above 80 per cent are possible with the corresponding additional securities. Examples of additional securities are pledges against pension assets, Pillar 3a and 3b retirement plans as well as stocks and bonds.
Here two different types of loans are combined with each other, specifically a fixed-interest and a variable-interest loan.
For new construction or renovations, banks offer what is known as a construction loan. This concerns a current account with a certain limit which is used to process payments. The interest rate for a construction loan is, as a rule, higher than for a normal mortgage. When the construction work is complete, the loan is consolidated, that is, converted into a standard mortgage with a more favourable interest rate. Today, it is also possible to get what is called a construction mortgage. This means that the construction loan is paid out in tranches, based on construction progress, as a Libor and/or fixed-rate mortgage. A construction mortgage costs less than a standard construction loan because no loan commissions are due.
A transfer of property (conveyance) is completed when an entry is made in the land register at the appropriate land registry. This entry must be made by the seller. Only when this land register entry has been made (and not earlier with the notarial certification of the purchase agreement) does the purchaser become the owner of the piece of property and obtain all legal rights to it (e.g. establishing real estate liens or being able to resell the property). These rights of disposal remain with the seller until the entry is made in the land register. The transfer of ownership can take place immediately after the contractual certification or at a later point in time.
This expresses the percentage of ownership of an overall property. It arises primarily in conjunction with condominiums.
From the bank’s standpoint, this includes insights into a potential borrower’s assets and income as well as the existence of any other debts. Additionally, previous repayment habits and credit history play a major role.
As a rule, financing for construction or a home purchase consists of both equity participation and debt capital. Debt capital refers to financial resources which are provided to the owner by a third party (e.g. from a credit institution).
In the case of a debt suspension, only the monthly interest payments are made during the term of the loan. At the same time and after consulting with the bank, the borrower does not pay the funds which were originally intended to repay the debt directly to the institution that issued the loan, but instead, for example, into a life insurance policy or retirement plan or an investment fund. The borrower then uses these assets to repay the amount of the loan when the term of the loan has been reached.
A low-interest loan. Such a loan is issued by, for example, the Zürcher Kantonalbank (ZKB) for new construction or modernisations that help minimise emissions and environmental risks and that consume resources more sparingly.
For standard real estate financing, a ratio between equity participation and borrowed capital of 20:80 is sought. Thus, for a purchase or new construction the bank contributes at most 80 per cent while the purchaser must himself provide at least 20 per cent from his own resources. Sources allowable for equity participation are primarily personal savings and financial securities which could be sold. Basically, it is also possible to include assets which come from early withdrawals from a pension fund. Since 1 July 2012, at least 10 per cent of the purchase price or the costs of the property must come from equity participation not drawn from a pension plan (Pillar 2). The buyer must thus in some way have access to at least 10 per cent ‘actual’ equity participation for the purchase of real estate.
This type of loan is made by relatives or private acquaintances. This alternative becomes attractive primarily if the prospective owner cannot raise the equity participation of at least 20 per cent as required by credit institutions, or the mortgage holder wants to avoid having a second mortgage with a repayment obligation. However, it is still recommended that a written contract be signed. It should list at least the amount of the loan being made, the repayment specifics, interest rate and rate adjustments.
Federal home ownership promotion
Since 1995, this law makes it possible to use the funds in company pension plans (retirement plans, vested benefits) for owner-occupied residential property. There is the choice of an advance withdrawal or pledging. Also see pension plans.
In Switzerland there are more than 2000 public construction development programmes which provide financial support for new construction or modernisation projects. www.bauwelt.ch/energiesparrechner brings some order to this wide array of subsidies. With just a few mouse clicks one can find subsidies for personal construction projects funded by the federal government, the cantons, local communities and power utilities. Measures to improve energy efficiency, such as refurbishing a building envelope, replacing a heating system or converting to renewable sources of energy are quite often supported. However, it’s also very worthwhile to investigate these resources for other types of construction projects because many can be deducted from the tax return.
These will be clarified by answering the following questions:
Are you willing and able to carry a certain level of risk as regards interest rates? Or would you quickly break your budget if rates were to rise a bit above where they are today?
Will you be occupying the home or will it be rented out, or is perhaps a two-family house being considered which would combine both types of usage?
How large is your personal tax burden (income and wealth taxes, imputed rental value, etc.)? Those who would like to optimise their taxes are often prepared to take on somewhat larger debt so they can deduct more debt interest.
Is there a point in time (e.g. retirement age) when your home should be as free from debt as possible?
How large can monthly payments be so that you can still finance your home?
In which way can you save certain funds or make them available so that the amount of the loan and thus also the interest debt can be reduced (certain savings goals, building up reserves, funds from company pensions or a Pillar 3 plan)?
Includes detailed information about all acquisition or construction costs as well as a listing of all available resources from equity participation and loan capital. In principle, a well-written financing plan gives the building owner a middle to long-range financial projection and also takes into account any accrued incidental expenses associated with the building as well as future amortisation of the loan. The running financial expenses for a homeowner should not exceed one-third of his gross income. A larger financial burden, however, is viable for those with high incomes. Keep in mind, however, that sound home financing must be done with the long term in mind, so that any possible increases in interest rates or unexpected expenses can be covered.
Fixed-rate loan or fixed-rate mortgage
This type guarantees a constant interest rate over the entire term and is thus well suited for those who place primary importance on always being able to calculate the charges for the loan. Example: a client wishes to have a precise budget. He requires CHF 500,000 to purchase a house. For this, he takes out two fixed-rate mortgages, each for CHF 250,000; one tranche is for three years, the other for five years. The interest rates will remain fixed for both of the fixed-rate mortgages over three and five years, respectively. Thus, the client is protected against any increase in interest rates, but on the other hand he would not profit if rates were to drop.
Most mortgages have a specific term, for example three, five or ten years. The bank client is well advised to consider ahead of time how he plans to handle his loan once this term ends. Notice periods must sometimes also be kept in mind, so one should closely check one’s credit file nine to twelve months ahead of time. Clients often decide to opt for an extension. In other words, the same credit institution continues to fund the remaining debt and the loan agreement is extended in time. If the conditions of the extension do not seem particularly attractive, the client should examine offers from other banks or credit institutions. It is fundamentally possible to carry different financing tranches for a property with multiple banks, but they must be backed up by corresponding mortgage notes.
Foreign currency loan
With this type of loan, one takes funds in a foreign currency with a low rate of interest. However, because the repayment is likewise in the foreign currency, exchange rates play a key role, and therein lies the risk because exchange rates can rise and fall very quickly. If, for example, the price for the foreign currency paid in Swiss francs increases, your loan debt increases 1:1. Transactions in foreign currencies are always associated with high levels of risk.
Forms of ownership
The Swiss Civil Code (ZGB) defines which rights a person can have with regard to physical objects. The purchase of some real estate might seem to be almost an everyday transaction for many people, but the legal aspects are complex, and the specific rights and duties differ depending on the chosen alternative.
Sole ownership refers to property which belongs to just one person.
Joint property: if several people are bound together by law (joint heirs) or a contract (simple partnership, community of property) into a financial collective, we refer to joint property. The individuals do not have free access to their shares, but rather any actions require the cooperation of all owners involved. Each individual has rights as regards the entirety.
Joint ownership: if several people each own part of a property which has no externally visible divisions of that property, they are joint owners. There is no need for cooperation on the part of other persons as with joint property. Every joint owner can sell or pledge his share. Disposition of the whole requires the cooperation of all joint owners. A special form of joint ownership is what is commonly known as a condominium.
Most banks as well as insurance companies which act as lenders offer their clients what are called forward loans or forward mortgages. Here, the interest rate for an amount to be paid out in the future is set in advance, for example six to a maximum of thirty months prior to pay-out. This makes sense if someone is purchasing an apartment off blueprints and wants to fix the interest rate in advance. However, banks also make special offers in case one wants to arrange and refinance in advance a mortgage which is coming to term. Of course, this all makes sense only if interest rates actually rise because for that situation a forward loan offers a good means of hedging. Just like any other additional safeguard, this comes at a cost, as lenders also require a premium (a forward surcharge) for this financing option.
Home ownership expenses
The following costs accrue on an annual basis: mortgage interest, amortisation (within fifteen years to two-thirds of the home’s value) as well as incidental and maintenance costs (e.g. heating, electricity, gas, maintenance, garden care, insurance premiums, etc.). For condominium owners, some of these expenses are covered by payments into the condominium association fee and into the association’s renovation fund. Such a renovation fund is not legally prescribed but is highly recommended. Those who want to be conservative as regards costs and budgeting should observe a proven rule of thumb: if one also takes into account long-term maintenance and renovation costs and assumes a long-term average interest rate for mortgages, the expenses will ultimately be higher than initially assumed. According to this rule of thumb, a piece of real estate over time will cost 5 to 6 per cent of the purchase price or the construction costs including the land.
Here all of the borrower’s household income and expenses are listed in detail for each month. The bookkeeping should not only budget regularly recurring costs such as mortgage interest, loan amortisation for the entire year, electricity bills, insurance premiums, etc., but also unscheduled costs and unexpected expenses (holidays, home repairs, dentist). The household accounting provides reliable information as to whether a home loan can be safely carried or in which way the budget must be modified.
Imputed rental value
The imputed rental value of apartments and houses must be taxed as hypothetical income. The reasoning behind this is that every property could also be rented out, which would result in taxable receipts. The imputed rental values are determined according to statutory provisions and formulas in each canton; they are generally between 60 and 90 per cent of the property’s market value. The goal is to strive for a situation where both homeowners and those who rent are treated equally. Homeowners are permitted to deduct mortgage interest payments as well as building maintenance/repairs from the imputed rental value.
Incidental expenses cover a wide spectrum and can arise in many ways during construction, during the transfer of property or simply during the use of a piece of real estate. Already during the purchase, incidental expenses often add up to several thousands or tens of thousands of Swiss francs. Depending on the canton, there are real estate transfer taxes, notary and land register fees, sometimes also additional fees for land surveys, permits, development costs, fees for technical experts, agents and other service providers. Real estate profit taxes plus estate agent fees, in contrast, are normally paid by the seller. Also not to be forgotten are expenses or taxes in conjunction with the pay-out of funds when, for example, a buyer withdraws funds from a pension plan to purchase residential property. Incidental expenses during the property’s ‘operation’ and use include, among other things, insurance premiums, regular maintenance and fees, service contracts for various appliances, for heating and building services, income and property taxes, the cost of energy and water, waste removal fees and much more. These items must be properly accounted for in a household budget.
Financing construction by taking out a life insurance policy. With this option, a conventional loan agreement is taken out over a longer term during which one pays accrued interest but not debt repayments.
At the same time, a life insurance policy is taken out. This serves as the collateralisation of the bank loan issued because here the monthly instalments are paid over a long-term contract period. If the life insurance policy reaches term, the saved amount is used for the full repayment of the loan principle.
In simple terms, interest is the price a lender charges a borrower, such as a bank client, for the use of money over a given time. In practice, the interest for a loan is generally paid every three or six months for mortgages. Higher interest can make the costs for a loan considerably more expensive for an owner-occupied home, specifically the housing expenses.
Example: client A borrows CHF 500,000 for his home from his bank. At 2 per cent interest, this costs him only CHF 10,000 in interest per year. At 4 per cent interest, however, the same loan costs CHF 20,000 in interest per year, equal to CHF 1667 per month. Normally, interest rates for short-term loans (Libor mortgages) are lower than for loans with a longer term (fixed-rate mortgages).
Interest constitutes an economically important factor. Interest rates depend on the central bank’s financial policy but also on the economic climate and the financial markets. If the economy is doing well, interest rates are generally higher because good earnings on investments and increasing incomes can be expected.
The land register records the legally binding owners of properties. As a rule, a solicitor is assigned to manage the land register. The land register is also definitive when it comes to the question of which rights and obligations are associated with a certain piece of property.
The land register consists not only of the actual title ledger in which each piece of property has its own page, but also other elements: the title plan establishes the exact property boundaries. In addition, there are records referred to in the title ledger (for example, explanatory statements and regulations for a condominium association, or establishing a right of way). This also includes a daily journal in which all land registry entries are listed chronologically. The importance of the land register can actually be seen from the following: someone who purchases a house does not become the legal owner when he signs a contract to reserve the property, even if he transfers the agreed purchase price to the seller. He can call himself the owner only when he is entered as such into the land register. Regulations about managing the land register are governed uniformly throughout Switzerland. Responsibility for its management lies with the cantons. Today, the land register is managed electronically in most cantons.
Land register extract
A land register extract provides information about, among other things, the property’s area, the owner, encumbrances, rights of way, etc. It is available from the land registry (the owner must give his permission) or directly from the seller.
Libor mortgages have gained in importance particularly in times of low interest rates. The rate fundamentally floats and, depending on the product, is adjusted to current Libor market rates, for example every three, six or twelve months. Libor stands for London Interbank Offered Rate, an official reference interest rate which is reported daily by key commercial banks and is announced in London.
Example: when a three-month Libor mortgage is first issued, the interest rate is fixed at the official three-month Libor (plus a customised margin the bank adds which can be, for example, 1 per cent). The interest rate remains constant for three months, then it is readjusted to the current reference interest rate, and so on. Although the financing is short-term, the clients generally sign a master agreement for several years. Libor mortgages are very attractive in times of low interest rates, however they carry the risk of fast rate increases if market rates are trending upwards. It is possible to hedge this effect with, among other things, a capped loan or to convert the Libor mortgage into a fixed-rate mortgage.
With a loan, a lender gives a borrower access to funds to use over a specific period of time. As a rule, a loan comes with interest payments and must be paid back at a specified time. Banks are normally the primary institutions which lend money, but of course commercial enterprises, insurance companies, pension plans or even private individuals can act as lenders. Loans made to friends or relatives are often done so without any interest charges. For the benefit of both parties, the specific conditions of the loan (interest rate, rate adjustments, term, termination, collateral on the loan) should be set down exactly in a loan agreement.
As a rule, this is issued using a standardised form from the credit institution. It requires that the borrower provide all information important for a possible issuance of the loan. This includes the client’s financial status as well as information about the property. In addition to the application, further loan documents must be provided, for example identity papers, a salary statement, tax returns and an inventory of assets. Also required are detailed information about the property such as the land register extract, blueprints, photos, any assessments, documents related to building insurance, etc.
This defines the amount that is made available by the financial institution. It is a component of the loan agreement and is thus binding for the lender and borrower.
This defines the period of time over which the borrower fully repays a loan issued to him based on contractual Agreements.
The term loan termination is used when an existing loan agreement is ended by either party. For many types of loans, this possibility is taken into account through notice periods. If these are observed, no penalty must be paid. If during the course of a loan termination the borrower does not observe the notice periods, he generally must pay the financial institution in question a prepayment penalty.
When financing your home, a mortgage loan is almost always the essential component; it can be taken out at virtually every commercial bank, at a regional savings and loan association, an insurance company or pension plan. These institutions are relatively generous in granting loans for real estate because of the underlying collateral and as a rule will finance 80 per cent of the overall cost. In doing so, though, a bank makes sure that the borrower’s net income is adequate to cover the monthly expense burden (mortgage interest and amortisation), even over the long term.
A mortgage note is the most frequently used means of securing financing for a piece of property (credit secured against real estate). The mortgage note is a security and is issued in the name of a particular person or as a bearer mortgage note. In both forms, the property carries liability up to the entered amount plus interest and debt enforcement costs. The mortgage note is issued as either a paper note or a register note.
In Switzerland, the purchase of a piece of property must be officially authenticated by a notary so that the purchase becomes legally valid. This is intended to avoid imprudent actions and gives the contractual partners total clarity about the transaction. At the same time, it provides a reliable basis for the entry of the rightful owner in the land register. Furthermore, all contractual partners involved have the opportunity to ask questions about how the purchase or purchase contract is to be processed. The publicly notarised contract becomes legally binding only after it has been signed.
Depending on the canton, the notary is a cantonal office or an activity practiced on a freelance basis. Some cantons also recognise a mixed form depending on the field of activity. The tasks of a notary include, among others, the notarisation of contracts and declarations of intent such as wills, the authentication of signatures, the public notarisation of real estate transactions, etc. Here the corresponding legal advice is also part of the package.
In the last few years, a growing number of banks and credit suppliers have made the switch whereby they no longer offer real estate financing only using branch offices, subsidiaries or brokers, but now they also conduct business over the Internet. Clients have the advantage of being able to gather information about financing offers at any time from the comfort of their homes. Today it is even possible to make a binding commitment for real estate financing over the Internet. As soon as contact is established and a certain mortgage is agreed, in most cases additional detailed documents still must be submitted in a conventional manner (files about the client and the property, review of information by the bank, etc.). As collateral for the loan, unmodified mortgage notes secured with the corresponding real estate are required. Now, however, since 2012 even the mortgage notes can be drafted and managed in electronic form.
Pension plan: Pillar 2
To ease the financing of personal real estate, since the 1990s you are permitted to use funds from a pension plan or from fixed retirement provisions (Pillar 3). These funds are basically applied to the purchase, construction, renovation of property or the amortisation of mortgages. A prerequisite is that the property in question be owner-occupied.
A distinction is made between pledging and pay-outs. With a pledge, you can commit retirement funds to the bank as collateral and thereby reduce the amount of equity participation needed. Example: the bank requires a share of CHF 100,000 from your personal funds, but you have only CHF 50,000 at your disposal. You can meet the requirements if you pledge CHF 50,000 of your retirement funds.
When the funds are paid out, the available vested benefits capital is paid out from the pension fund and used to pay a part of the purchase price directly; you have, so to say, more liquid assets. The paid-out capital must be taxed. For this advance withdrawal you must be in a position to compensate the resulting gap in your pension with private provisions. Furthermore, an advance withdrawal is tied to a ‘restriction of sale according to the pension plan’ (BVG) as entered in the land register. Since 2012, however, only a maximum of half of the required equity participation can be gathered in this way.
This type of loan is based exclusively on the borrower’s personal creditworthiness and does not take into account his financial solvency. To analyse a client’s creditworthiness, the bank examines his assets, income and borrowing capacity.
If a borrower terminates a currently existing loan earlier than the specified term, he can be liable to the bank to pay damages. Example: consider a fixed-rate mortgage with a five-year term and after just two years the client wants to terminate the financing. The bank can demand that damages be paid because the credit institution suffers the loss of contractually guaranteed interest income or other financial damage.
An assessment is extremely important when purchasing, financing and selling real estate. One should also keep in mind that the bank providing the financing will want to reassess the property if there is a subsequent review of the loan file, if there are changes in the financing or the loan is renewed. The value of a property depends in general on the location, size, quality of construction, demand on the local real estate market and many other factors. Banks today often use computer-based assessment models, especially for standardised single-family homes and condominiums with comparable characteristics. In addition, an independent assessor, who might be hired in case of an estate distribution or if a sale is being considered, would ask this question: what would the property’s actual market value be if one would offer it for sale under standard conditions?
The purchase contract for a building plot, a house or an apartment is only valid when publically notarised. It forms the basis for the transfer of property in the land register. As opposed to tenant law, in this area there are seldom standard or sample contracts. In practice, many contracts are drafted in advance by companies and sellers. Thus it can be worthwhile to have an independent solicitor or notary explain the pros and cons of a purchase contract. The notary, acting as a registrar, is neutral in his dealings with both contractual partners.
Anyone purchasing an apartment or a house that currently exists only on the architect’s blueprints generally signs a reservation agreement. Whether or not such reservation agreements are at all valid is often unclear. The Swiss Civil Code (ZGB) prescribes that the purchase of property must be publically notarised. Of course, it is important for buyers that they enter into any obligations whatsoever only if they have serious intent and already have a financing commitment from a bank.
Any advance or instalment payments should be made only with extreme caution and when they are tied to progress in the construction. Never make any large payments if construction has not even begun in a serious way. The purchase is legally binding only when the purchase contract has been publically notarised by a notary and signed. The documents which are definitive are those that are being notarised. Beware: other blueprints, brochures, websites, showcase condominiums and the like are simply for informational purposes and are not legally binding.
Furthermore, in most cases the owner or the purchaser can select or have a say in the interior finishing, materials, kitchen, bathroom, etc. However, requested modifications and extras should always be agreed in writing with specific cost details so that the buyer later does not experience any nasty surprises. The purchase process generally ends when the keys are handed over, with the transfer of the property and, depending on the situation, with the acceptance of the completed construction project.
Real estate liens
A real estate lien is also called ‘limited rights in rem‘ which grants its owner permission to have a piece of property be disposed of as needed. The proceeds could be used, for example, to cover a bank claim from a mortgage loan when the debtor cannot meet his obligations. Real estate liens can be ordered as a promissory note or as a mortgage assignment.
Real estate profit tax
Real estate profit taxes are billed, for instance, when an owner sells a plot of land, an apartment or a house and makes a financial gain compared to the cost basis. The higher the amount and the shorter the time the piece of property was held, the more impact there normally is on the taxation. In the case of a replacement purchase of private residential property, one can apply to have the real estate profit tax deferred. The real estate profit tax is paid by the seller, and its presumed amount is calculated by the responsible tax authorities. If it is not paid, in most cantons there is then a legal lien on the property. For this reason, the amount of taxes is generally ensured with a frozen bank account or a cash deposit.
Real estate secured loan
A real estate secured loan is the opposite of a personal loan. It is thus not based on the borrower’s personal creditworthiness but only on a financially-based credit standing. In other words, it is secured by liquid assets or non-cash assets which are loaned for this purpose.
Since the revision of the Swiss Civil Code (ZGB) in 2012, it is no longer mandatory that mortgage notes be written and managed on paper. This simplifies overall business transactions, in particular between banks, land registries and property owners. For homeowners, for example, there is no longer the risk, which should not be underestimated, that a physically existing mortgage note could be lost. Since 2012, it has also been possible to convert an older conventional mortgage note into a register note at modest expense.
The new reference interest rate that is relevant for Switzerland is called Saron (Swiss Average Rate Overnight). This overnight rate is based on the so-called Swiss franc repo market. The calculation is based on completed transactions: when banks place funds with the Swiss National Bank overnight. In contrast to the Libor, these rates are based on actual transactions - and thus the system is far less susceptible to manipulation. Using a specific method, the bank uses the one-day rate to determine a longer-term interest rate (compounded saron, i.e. “compounded saron”).
Securitisation is the technical term for the sale of mortgages to a purchaser who finances this transaction, for example, using institutional investors with a bond from abroad. It is thus another form of refinancing in addition to the traditional forms such as funds from savings, medium-term notes, etc.
Anyone who takes out a mortgage from a bank generally also receives a form with the title ‘Security assignment’. The borrower, here the bank client, uses it to transfer the property to the bank’s mortgage notes. The bank, in turn, requires mortgage notes as collateral for the mortgage loan it issued. In simpler terms, the bank thus has more possibilities for recovering claims against the borrower, for example even from a commercial loan. The security assignment, however, is the standard case in banking transactions today.
Types of loan repayment schemes
A basic distinction is made between an amortising loan and a bullet loan. With a bullet loan, the interest is paid at regular intervals. The amortisation itself only happens at the end of the term. This type of repayment scheme has the advantage that during the term one pays a smaller amount while simultaneously achieving the amortisation ratio using other means of savings.
With an amortising loan, one makes equally high payments at predetermined dates. These are initially used to pay off the interest. After deducting the interest, the remaining amount is used to reduce the outstanding balance of the loan.
Variable-rate loan (Flex)
Different types of variable-rate loans have no specific notice period but instead the interest rate is reset, for instance, after every month, three months or six months. As a result, a borrower can choose to terminate a variable-rate loan at any time, or at least switch over to another mortgage from the bank without being subject to a prepayment penalty at the bank.
Compared to a fixed-rate loan, a variable-rate loan always involves a certain amount of risk because the borrower only benefits if prevailing market interest rates drop or at least remain constant. If interest rates rise, the interest burden of a variable-rate loan increases. A variable-rate loan can generally be cancelled after three or six months.