Affordable ways to finance your holiday home

Jürg Zulliger

Since the outbreak of the COVID-19 pandemic in 2020, many people prefer to spend their holidays in Switzerland. The demand for holiday homes and apartments in well-developed locations has increased considerably. But the dream of buying your own holiday home has its price. In the Upper Engadine, prices for condominiums are around CHF 14,000 or CHF 15,000 per square metre. For particularly exclusive properties in top locations, with stunning views of the lake or mountains, the prices climb even higher.

Financing: initial steps

Of course, prices are more affordable in Engelberg, Adelboden or Laax. But nevertheless, the fact remains: not everyone who dreams of a holiday home in a beautiful natural landscape can afford it. ‘These holiday or second homes are still considered a luxury,’ say many estate agents and bank experts from tourist regions.

If you can already picture your new ‘dream apartment with mountain view’, the first thing you need to do is get the financing sorted out. These are the top questions you need to focus on:

• What kind of mortgages are being offered by the banks (what is the loan-to-value ratio)?
• How can you, as an applicant, prove that you can afford to pay back the loan you need?

‘Bank practices can vary greatly, especially when it comes to holiday homes,’ observes Florian Schubiger, Finance and Pensions Consultant at VermögensPartner. Since there has been a rising trend in prices for good properties in good locations, some banks are already expressing reservations about the size of loans. The highest possible loan or loan-to-value ratio usually varies between 60% and 65%, according to the VermögensPartner expert. Here’s an example: Markus Huber (name changed) buys a holiday apartment in Laax (Grisons) for the advertised price of CHF 1 million. So the banks would contribute about CHF 600,000 to CHF 650,000, depending on the case, through a mortgage.

The question of the loan-to-value ratio

There are two different approaches here: some banks use the actual purchase price as a basis and contribute, for example, 65% of it. So Markus Huber would have to be able to provide CHF 350,000 of his own capital. Other banks take a more conservative approach: they deduct a certain margin from the purchase price (say, 10%) and contribute 60% or 65% on this basis. In this case, Markus Huber would need to contribute more of his own funds.

It is important to note that pension funds or other similar forms of financial support cannot be used for holiday homes (only for primary residences).

Nowadays, there is considerable variation across banks in terms of rates. For a long time, it was common for them to offset holiday homes against a primary residence through an increased interest rate. Of course, before you decide on a financing partner, you need to make sure the overall package is right: how much would the loan be if approved? Are the interest rates on offer fair and in line with the market?

Mortgage affordability

During the course of the negotiations, you won’t be able to avoid compiling documents on your financial situation. Banks are obliged to take a closer look when it comes to financial affordability. This well-known rule applies: your running costs resulting from your property ownership and mortgage contract may not exceed a total of about one third of your gross disposable income. With this classic affordability calculation, the banks will set a relatively high interest rate of 4.5% or 5% as a precautionary basis for their calculations.

As an initial conclusion: if you’re dreaming of buying a holiday home, you need a solid income. To ensure that everything is in order, the bank will of course look at your existing fixed costs: if the applicant lives in rented accommodation, these fixed costs will of course be taken into account – or simply deducted from the eligible salary. If someone already owns their own home as a primary residence, the relevant fixed costs (in particular bank interest) are also included in the affordability calculation. Conversely, regular payments received from renting out a property to third parties count as income.

‘But in terms of both the loan-to-value ratio and the affordability calculation, banks interpret the specifications and figures rather differently,’ says Florian Schubiger. In practice, it is therefore worthwhile getting multiple quotes. The market region where a bank typically operates (urban areas, cities, mountain regions) often makes a significant difference. Banks that are rooted in tourist regions have their own rules of play for holiday homes.

Take GKB, for example: no added interest for holiday homes

Let’s take a look at the approach of the Graubündner Kantonalbank (GKB) as an example. While holiday homes only account for a small part of business for banks based in urban areas, they constitute a significant portion of the portfolio for banks in Grisons or Valais. Stefan Buchli, Head of Mortgages at Graubündner Kantonalbank in Chur, says: ‘We usually provide loans for holiday homes at 75%. We don’t calculate this on the basis of the purchase price, but rather on our own bank valuation. This is our GKB loan-to-value basis.’ Whether or not the bank valuation usually corresponds with the actual purchase price is not a question that can be answered in general terms. Alpine cabins are currently selling at very high prices. ‘For example, it can be the case that our loan-to-value basis is lower than the emotional value of these properties,’ says the GKB mortgage specialist.

Furthermore, it is common practice at GKB that loans are not amortised to two thirds, as with a primary residence, but to 60%. Overall, this business practice takes into account that, from a financing standpoint, a mortgage on a holiday home does not provide quite the same level of security as with a primary residence. Stephan Buchli and Florian Schubiger agree that the practice for holiday homes varies greatly from bank to bank. ‘Of course, we believe that these properties have a completely different significance because tourism plays a major role in practically every region of the canton,’ says Stefan Buchli from GKB. For example, added interest on holiday properties was abolished more than 10 years ago. So when it comes to financing with GKB, the following rule applies: interest rates are the same, whether it’s for a primary residence or a holiday home.

In summary, loan-to-value ratios, interest and affordability calculations vary even more greatly for holiday homes than elsewhere in the market. If you want to find the best deal for your holiday property, you should compare your options very carefully.