Financing your own home: all about equity and affordability
The dream of owning your own home or condo is widely shared: we tell you what you need to know about home financing and show you how to budget properly before buying a place of your own.
In most cases, you will need to take out a mortgage to finance your single-family house or condo. But that does not mean the purchase of the property can be wholly financed by a mortgage lender, such as a bank. You must also contribute a share of the capital yourself, while earning an income that is sufficient to ensure you can afford the property in the long term. This is where the terms equity and affordability come into play, which we discuss in greater detail below.
Equity: home financing with your own funds
As indicated, owning your own home is a major investment. In Switzerland, you generally need to come up with at least 20% of the purchase price or market value from your own funds to finance your dream home, and borrow the remaining 80% as a mortgage from a bank or other mortgage provider. A first mortgage can cover up to two-thirds of the purchase price, and a second mortgage can finance the remainder. Unlike a first mortgage, this second mortgage must be repaid through regular payments within 15 years or by the time you reach retirement age.
Equity or own funds are the terms used to describe the money that you can raise yourself to finance your purchase. The higher the amount, the smaller the mortgage you have to take out to finance your home. With a smaller mortgage your monthly mortgage interest costs will also be lower.
Breakdown of equity: pension assets and hard equity
Up to 10% of your equity can come from an advance withdrawal from your occupational pension plan or pension fund (pillar 2).
The other 10% must be financed from hard equity, which can comprise the following:
- Account balances and savings
- Securities and valuables
- Life insurance policies (surrender value) / surrender of an insurance policy
- Advance inheritance, gifts or interest-free loans from family
- Unencumbered building land
- Funds from restricted private pension plans (pillar 3a)
When using pension fund assets, you must consider the following:
- You will pay additional taxes, because pension fund monies are taxed as income at a reduced rate.
- You will subsequently receive reduced benefits from the pension fund. Benefits may also be reduced in the event of disability or death.
- In the event of personal bankruptcy, you run the risk of losing not only your home but also your retirement savings.
- In principle, we recommend carefully analyzing your pension plan before you proceed.
Do you want to find out how much financing you can afford? Use our mortgage calculator or arrange a non-binding consultation with our partner UBS.
The makeup of own funds: an example
- A single-family house has a market value of CHF 1,000,000.
- The purchase requires you to contribute 20% or your own funds, i.e., CHF 200,000.
- A maximum of 10% of this may come from your pension fund (pillar 2) (see explanation in the next section).
|
Source |
Amount in CHF |
Remark |
| Personal account | 10,000 | |
| Savings account | 50,000 | |
| Proceeds from sale of securities | 10,000 | If you are considering selling securities, you should keep an eye on the state of the financial markets. |
| Early inheritance | 50,000 | An advance on the inheritance or a gift can also be advantageous for the parents, due, for example, to tax considerations. |
| Early withdrawal from pillar 3a | 30,000 | All pillar 3a funds count as hard equity. |
| Advance withdrawal of part of the pension fund assets* | 50,000 | In this example, money from the pension fund makes up 5% of the value of the home. The maximum permissible amount would be 10%. |
| Total available equity | 200,000 | There is sufficient equity to obtain a mortgage. |
*The minimum amount for the withdrawal of pension capital from the pension fund is CHF 20,000.
Source: UBS key4 mortgages
The affordability of a mortgage
Affordability concerns whether you can manage the long-term costs of owning a property. Once you have obtained a mortgage, in addition to the required personal funds, you will also incur ongoing costs for mortgage interest, amortization of the mortgage and maintenance. These costs are calculated in relation to your gross income (including your 13th month’s salary) and should not exceed one third per year. Meeting this requirement is not always easy, as Swiss real estate prices have risen more sharply than incomes in recent years.
You must include the following costs when calculating affordability:
- Mortgage costs: You calculate these costs using an imputed interest rate, which is usually around 5%. This rate, which is higher than current market interest rates, is intended to ensure you can hold on to the property even if interest rates go up.
- Amortization or repayments: As mentioned at the start, the second mortgage must be amortized. Budget around 1% of the total bank loan per year for amortization.
- Maintenance and additional costs: Again using an imputed interest rate, plan to spend 1% of the value of property's value on insurance, heating, electricity, gas, water, provisions for renovations, ongoing repairs and to maintain the garden. The joint cost of condominiums (stockwerkeigentum) also counts as an additional cost.
If you buy a property together with your partner, you may calculate your gross income based on your joint incomes. The condition is that you have agreed to share joint and several liability, i.e., that both of you are liable.
Remember also that your gross income will usually decrease when you retire, meaning you'll need to recalculate the affordability of the mortgage. We recommend you consider the topic of your housing arrangements in old age at least ten years before you reach retirement age.
Affordability calculation – case study
Our affordability calculation illustrates the ongoing home ownership costs of a married couple with a joint income of CHF 175,000.
Example 1:
|
Purchase price of the property |
CHF 800,000 |
| Own funds (20% of the purchase price) | CHF 160,000 |
| Mortgage (80% of the purchase price) | CHF 640,000 |
| Running costs: | |
| Mortgage interest (5%) | CHF 32,000 |
| Amortization (1% of the mortgage volume) | CHF 6,400 |
| Maintenance and additional costs (1% of the purchase price) | CHF 8,000 |
| Total homeownership costs | CHF 46,400 |
| Ratio of homeownership cost to income | 26.5% |
Example 2:
|
Purchase price of the property |
CHF 1,600,000 |
| Own funds (20% of the purchase price) | CHF 320,000 |
| Mortgage (80% of the purchase price) | CHF 1,280,000 |
| Running costs: | |
| Mortgage interest (5%) | CHF 64,000 |
| Amortization (1% of the mortgage volume) | CHF 12,800 |
| Maintenance and additional costs (1% of the purchase price) | CHF 16,000 |
| Total homeownership costs | CHF 92,800 |
| Ratio of homeownership cost to income | 53% |
Conclusion: A home costing CHF 800,000 is financially viable for this family, as the ownership costs account for less than one-third of their income. If, on the other hand, they wanted to purchase a single-family home costing twice as much, the ratio of home ownership costs to income would be 53%. The mortgage would therefore not be affordable because the couple’s income would need to be at least CHF 278,400.
It is therefore always important to carefully weigh up and calculate in advance which property is suitable for realizing the dream of home ownership.