What personal funds should I use to buy real estate in Switzerland?
Becoming a property owner in Switzerland without personal funds? Unfortunately, it isn’t possible. To secure a mortgage to buy your principal residence in Switzerland, you must make a contribution from your personal funds to a value of at least 20% of the price of the property, at least 10% of which cannot come from the 2nd pillar or a loan. You don’t have that kind of an amount in your savings account? Don’t worry! Here are various sources of personal funds that you might not have considered.
Choosing the right strategy for your personal funds can save you more than a low interest rate
Your personal financial contribution to buying your home doesn’t have to come from your bank account alone. A combination of various sources of personal funds could also help you reach the required amount. Moreover, choosing the right strategy for your personal funds can save you more than a low interest rate.
You must also ensure you allow for the money you will need for the various costs of purchase which amount to around 5% of the price of the property, as these are not included in the calculation of the mortgage. For example, to buy a home costing CHF 1,000,000, you will need at least CHF 200,000 in personal funds, 100,000 of which aren’t from the 2nd pillar. In addition to this are approximately CHF 50,000 for the costs of purchase.
14 sources of personal funds for securing your mortgage
Here are 14 sources of personal funds, each of which has its advantages and disadvantages. If you don’t know which solution is best for you, our advisors will be pleased to help you make the right choice.
What personal funds should I use to buy real estate?
The first instinct is to use your savings. After all, your savings are the money which is most readily available to you. However, once you have used this money as a down payment for your loan, you won’t be able to use it for other projects. It is therefore important to ensure that your remaining savings are sufficient to cover all your future financial needs before you use this money as your personal funds for a mortgage. Whatever you do, make sure you have put some money aside for unforeseen circumstances.
You are able to sell shares, bonds, investment funds or other types of securities to complete your personal funds. According to the allocation of your investment portfolio (risk, diversification, etc.), the value retained by the lender may vary.
If you don’t feel that it’s the right time for you to sell, you can also pledge the securities, or provide them as a lien. This is known as a Lombard loan. However, the interest on the repayment of this loan has to be accounted for in the debt ratio.
Do you own any art or other valuable objects, such as jewellery or precious metals? Selling these things may enable you to increase your personal funds. In some cases, the lender may also allow you to provide the object as a lien. The value of such objects can fluctuate, however, and there is a risk of overestimating or underestimating their value.
You can also contribute to your personal funds by making a withdrawal from the 2nd pillar (at least CHF 20,000). You can choose to apply for a lower mortgage if you withdraw more than 10% of the value of the property, as long as at least 10% comes from one of the other sources. Remember, however, that a withdrawal will reduce your retirement benefits as well as your coverage in the case of death or disability.
To avoid this, you can choose to provide either some or all of the money you require as a lien. You will then be required to pay more in interest, although you will also be able to deduct a higher amount from your income on your tax return. Depending on your marginal tax rate, this strategy can save you money.
You can withdraw the capital from your 3rd pillar to buy your primary residence, but you will not be able to use this money when you retire. Tax will also be levied on the withdrawal. To avoid this, it is also possible to pledge the 3rd pillar, i.e. to provide the sum as a lien without withdrawing it. This solution is not always accepted by lenders, or they may require the conclusion of a risk insurance policy for their own coverage.
Provision of insurance policies as a lien
Life insurance policies can also be provided as a lien. According to the type of policy and the lender, a differing percentage of the cash value is taken into account, which is between 60 and 90%.
Non-repayable, interest-free loans are accepted as personal funds. These are usually a loan from a family member, and similar to an advance on an inheritance. You can request a loan from a third party, but if you have to pay it back, the total repayment and interest will have to be taken into account in the calculation of your debt ratio and could be at your disadvantage.
A gift is the perfect contribution, but there are a few details to take into account. According to the degree of kinship and the canton, gifts may be liable for tax. If the gift is from your parents, it can be considered as an advance on your inheritance, in which case it is necessary to ensure that no other heir is disadvantaged.
Once the matter of inheritance tax has been settled, your inheritance can be used as a personal contribution.
Advance on inheritance
You can make use of an advance on your inheritance as long as the requisite shares of the other heirs are not disadvantaged. According to the degree of kinship and the canton, such an advance may be subject to taxation at the time of death.
If someone close to you is already a home owner, they may be able to increase their mortgage to enable you to use the respective sum as your personal funds. Parents are usually able to do this for their children. However, it is necessary for you to decide whether this is a loan, a gift or an advance on an inheritance. An increase in the mortgage has implications for the interest rate and tax deductions. You should discuss how to manage these effects.
An alternative financing solution proposed by Evahomes.ch allows Swiss investors to provide you with the personal funds that you need. The repayment of such a loan must be added to the costs of your mortgage, however.
Work that you carry out
If you plan to carry out some major work yourself surrounding the construction of your home, such as painting, tiling, etc., this can be counted as a personal contribution.
If you own land, this can be used for the construction of your home or serve as a guarantee.
The choice of certain sources of personal funds has implications for your retirement and your level of taxation. Our advisors can inform you in detail about the various effects, so that you can make the choices which are the best suited to your situation and your plans.