28Jan2015

Mortgage loans

A mortgage loan is a long-term credit, guaranteed by a right to real estate lien. This credit involves a payment (in theory a one-time transfer of funds) to the debtor. The debtor is responsible for paying interest and eventual amortisations according to the contract terms.

In bank practice, the term "mortgage" often refers to the lien, the debt and the document.

Mortgage loan structure

In general, the mortgage loan covers 80% of your real estate property's value. The remaining 20% is personal equity. The majority of financial institutions split this debt into two ranks. The 1st rank covers 66.6% of the property value and the 2nd rank 13.4%. The 2nd rank must be amortised over 15 years, but at the age of retirement at the latest. Certain banks offer a loan with a 1st rank rate over 100% of the property value if the titles, the vested benefits allowance, or other assets are used as collateral (used as guarantees).

Qualifying conditions

Financial institutions consider the three following criteria in granting real estate financing:

You have 20% of your personal equity at your disposal (including 10% that does not come from your pension fund nor refundable loans)
The costs (interest + amortisation + maintenance costs) should not represent more that 33% of your income.
A property value that corresponds to the buying price and allows you to obtain up to 80% financing.

Calculating debt service ratio

In order to determine whether or not you have sufficient capital to receive a loan, financial institutions will generally make the following calculation:

Value or purchase price of the real estate property	CHF 1'000'000
Personal equity 20%	CHF 200'000
Transfer fees (example 5%, depending on the canton)	CHF 50'000
Total personal equity needed without taxes on the eventual withdrawal of the LPP and without eventual mortage note creation fees	CHF 250'000

Debt	CHF 1'000'000 - CHF 200'000 =	CHF 800'000
1st rank 66.6%	CHF 666'000 x 5% =	CHF 33'300
2nd rank 13.4%	CHF 134'000 x 5% =	CHF 6'700
Amortisation	CHF 134'000 / 15 =	CHF 8'930
Additional fees 1% of the purchase price or of the property value (electricity, heating, charges, maintenace, building insurance, etc.)		CHF 10'000
* Leasing		CHF 4'800
* Private credit		CHF 0
* Alimony		CHF 0
Total charges		CHF 63'730
The total charges must not exceed your gross annual third party income. The minimum income will be...	CHF 63'730 / 33% =	CHF 193'120