Death and real estate

Author : Kristen

Death and real estate

Planning for death of one of the property owners is emotionally difficult. However, it is important to envision different scenarios while all is well, so that your real estate property can be retained whatever happens.

In Switzerland, the risk of death is not automatically covered as part of real estate financing. For this reason, it is necessary to conduct a detailed analysis to assess the consequences of such an event. We even advise you to conduct such an analysis every time your personal or family situation significantly changes (marriage, birth, job change, etc.).

The goal is to make sure that the surviving spouse can continue to enjoy the property in the event of death of the other. More precisely, you want to financially ensure the possibility of retaining it.

Usually in the case of death, the secured creditor (mortgage lender) will conduct a new risk evaluation applying the same qualifying conditions as if the property were a new acquisition. This analysis will deal with, among other things, the ratio between the theoretical changes resulting from financing and the new family income (widow's/widower's pension, etc.). Keep in mind that this theoretical rent should not exceed a third of the income.

Let's look at an example :

Purchase price of property   CHF 700,000
Existing mortgage loan 80 % of purchase price = CHF 560,000
Couple's combined income   CHF 125,000

Calculation of theoretical costs

Interest 5 % of mortgage loan = CHF 28,000
Amortisation 13.4 % * CHF 700,000 = CHF 93,800 / 15 years = + CHF 6,250
Maintenance costs 1 % of the property value = + CHF 7,000
Total costs   CHF 41,250
     
Burden rate: CHF 41,250 / CHF 125,000 = 33.00 %

Let us assume that Mr. A dies and Mrs. A retains a total annual income of approx. CHF 100,000 in addition to the widow's first and second pillar pension. The amount of costs remains unchanged at CHF 41,250, but when you divide them by the new income (CHF 41,250 / CHF 100,000), the result is now 41.25% of the income.

It should be noted that this new situation calls for higher than normal charges. Consequently, this will no longer allow for standard financing and the financial institution will probably require an extraordinary amortisation in order to get back to an acceptable loan amount. In the case of financial impossibility, the consequence would be to rent or sell the property.

On the other hand, if you are aware of the risk, you can easily take out an insurance policy that offers coverage through indirect amortisation which also covers the risk of death. The cost of the collateral will thus be integrated into the required amortisation and will not add to the monthly charges. In our example, the new situation after amortisation of one part of the loan will be as follows (assuming in our example that there is CHF 100,000 in capital after tax):

                                  

Purchase price of property   CHF 700,000
Existing mortgage loan 80 % of purchase price = CHF 560,000
Partial amortisation of death benefits   - CHF 100,000
Remaining loan   CHF 460,000
Income and accumulated pensions   CHF 100,000

Calculation of theoretical costs

Interest 5 % of mortgage loan = CHF 23,000
Amortisation Not required + CHF 0
Maintenance costs 1 % of the property value = + CHF 7,000
Total costs   CHF 30,000
     
Burden rate : CHF 30,000 / CHF 100,000 = 30.00 %

Thus, financing is still possible!

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