Key Post The mortgage system in Switzerland

OK, so lets start with an example of the typical criteria used by a bank to determine if a customer is suitable for a mortgage:

Assume that Hans-Jourg as seen a suitable home with a market value of 500K that he wishes to buy and he approaches the bank about a mortgage, the basic criteria to get of the starting block would be:

- about 45 years old and a steady employment history
- can meet 20% of the market value (100K) in demonstrable savings
- mortgage must be reduced to 67% by retirement age
- interest, amortisation and maintenance can not account for more than 33% of annual income

So slotting all of this into the bank calculator, give the following figures:

Interest charges (long-term average 5%) 20,000
Amortisation (5% of mortgage portion to be amortised) 3,250
Maintenance and running costs (1% of the market value) 5,000

Total 28,250

This would mean that to be considered for a mortgage Hans-Jourg would need to have an annual income (ex bonus and OT) of about CHF 85,000 pa

A couple of comments on that:

• The interest rate used is a long term average, the current rate is about 0.8% to 1.25%
• The 33% of salary restriction is to ensure the borrower is not over burdened with debt
• The requirement to reduce the amout outstanding to 67% by retirement is to ensure that the borrower keep their home when income drops on retirement
• The 45 years of age requirement is typical and as a friend of mine says: Swiss banks are not in the habit of lending large amounts of money to immature adults!

A part from the requirement to reduce the mortgage to 67% of the market value before retirement, there is not expectation that the remaining amount will be paid back during the life of the borrower.

I'll deal with how the mortgage is structured in another post.

Mortgage Application - Mortgage Structure

OK, so lets assume that Hans-Jourg has got his mortgage of 400K...

The mortgage itself will be broken down in to at least two tranches, the amount that will be amortised over the working life of the borrower and the rest. Often there are perhaps up to 5 tranches, depending on the preference of the borrower.

Once the number and amount of each tranche has been decided upon the next thing is for the borrower to decide upon what interest he will pay on each tranche, the usual options are:
- Fixed Rate Mortgage: a particular rate for a given period between 2 and 10 years
- Libor Mortgage: rates is based on the 3 month Libor rate at the start of the quarter
- Capped Libor Mortgage: the same as the Libor mortgage, but the rate is capped for an agreed period. The cap is usually close to the rate on a Fixed Mortgage.

So what one ends up with is a mortgage upon which you are paying a basket of interest rates, depending upon your personal choice.

There is one other thing to take in here before we move on to taxation:

When you first take out a mortgage on a new property, the tranches are set up as individual charges on the property, like everywhere this involves the law, the surveyors and so on, so it is expensive. However unlike else where, these charge of the property are independent of the mortgage itself and so can lead to some interesting possibilities:

- You can use the same documents over and over again to switch mortgage provider without any additional fees. So the administration costs of switching providers is minimal.

- You can split up the charges over more than one provider, so that one part of the mortgage is with bank A, while another part is with bank B and so on.

- When a tranche in your mortgage comes up for renewal you can switch to a cheaper provider if you like.

- You inherit the charge documents with the property and can use them to obtain a new mortgage to pay off the mortgage provider of the pervious owner

- If you sell the property you can pass on the charge documents to the new owner and he can use them to obtain a new mortgage

The bottom line here is that unless you want to change the tranche structure obtaining a mortgage on an existing property does not involve much by way of administration costs.


Next up taxation, which is a heavy one.

Swiss Tax System - Overview

Before going into the taxation of a mortgage, I think it is worth having a quick overview of how the Swiss tax system works, because it is going to through up a major issue for most people - the tax rate!

The administration of Switzerland is very similar to the USA, in fact the the original US system of Federal, state and local government was based on the Swiss Confederation of the time!

So what that means is that we pay taxes at 3 levels:
- Federal: for defence, federal police, foreign affairs, public transport, federal infrastructure etc.
- Canton (like a county or a state in the US): Road system, state police, medical services, education and so on
- Municipal: Local police, public transport, roads, schools, social services medical advise.....

You pay the biggest chunk of your taxes at municipal lever say about 60%, about 25% at state and the remaining 15% at federal level.

The rate of tax you pay is set at each level and is dependant on the budgets at that level. This means that the effective income tax rate varies from place to place! For example, this means that someone living in the Canton of Jura pays taxes at an effective rate of about 42%, while someone living in the Canton of Zug pays at an effective rate of 24%!!!

The rules for the calculation of taxable income also vary from place to place, some of the typical things you can expect to find as tax deductibles include:
- Costs of professional education, not paid by your employer
- Cloths allowance for management
- Cloths allowance for craft workers
- travel allowance: cost of getting to and from work
- lunch allowance if your employer does not provide a canteen or paid allowance
- health insurance
- interest paid on bank loans and credit cards

The bad news for couples is that there are not double allowances for married or civil partnerships, so all income is combined and you get the same allowances as a single person.

The good news for investors is that all capital gains on investments are tax free, provided you are not considered a professional investor => more than 10 trades per month.

We don't have a PAYE system so wages are paid gross (less pension and social security) to Swiss citizens and permanent residents, while all others are subject to a withholding tax. Taxation is on a preceding year basis and the amount is settled with a single payment (less discount) or in 3 instalments.

OK, so tomorrow we'll look at the taxation of mortgages...

As a footnote, I might add that the tax collection system is also used to collect what used to be called church tides or taxes. If you register as a RC or a protestant, the system will add a few hundred extra Francs to the bill and hand it over to the selected church as well.

cashier said:

Not sure about the 45 year age requirement though, most people have teenage children by that age, what are they suppose to do in the meantime, rent??

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Yes the norm is to rent, most people do not aspire to own a house and in fact may consider it a really stupid thing to do with your money!!!! I've often been asked by people how could the Irish be so stupid as to go buying a house and the question is asked with a genuine wish to understand why....

Typically a couple would:
- Rent a small apartment when starting out
- Move to a bigger apartment when the kids come along
- Move back to a smaller apartment when the kids go to college etc...
- Often rent in the country after retirement while they are still active
- finally move to a town or city in later life, when easy access to medical services etc are needed.

They feel that the same house is not suitable for all stages of live, so it does not make since to buy one and then pump every cent you earn into paying for it. Particularly as there is not guarantee that you will be able to dispose of it when you need to, in other words all your eggs in one basket and the Swiss do not like that idea at all.

Swiss Tax System - Mortgage

OK, so on to the taxation issues, because the tax systems varies from town to town this can only be a discussion of general concepts:

Interest
All loan interest is deductible when calculating taxable income and that includes credit card interest too. So there is no advantage to having a mortgage over any other type of debt.

Home Maintenance
Unlike Ireland the costs of maintaining a home in it's present condition are tax deductible. However any work that adds value, such as an attic conversion would not be allowed, but if of course you were to finance it by a loan, the interest would be deductible.

Wealth Tax
Here we pay a vary low wealth tax on all our assets, including the home, so owning a house would increase your wealth tax by perhaps a few hundred Francs.

Imputed Rent
If you own a home and it debt free, then your income for tax purposes is increased by an amount equal to the rent you would expect to earn if you let the property. This could be as high as 30% of your salary, so it is a significant amount. However because the rules vary from town to town, the application of this rule can differ from an amount of zero to 100% of the imputed rent.

The bottom line here is that there is very little advantage to owning your own home over renting. It really is a personal preference issue rather than a financial one.

Mortgage - financing

On the banking side of the equation, it is worth noting how mortgages are financed.

The majority of the finance for mortgages comes from pension funds for two reasons, firstly Swiss pension funds are required by law to keep a large portion of their assets in Swiss property and secondly most of the large pension funds pay out pensions rather than having them converted to annuities, so they are interested in sources of guaranteed long term income as a capital gains. As a result pension funds are willing to buy long term MBS from the banks.

All of this means that the banks are able to match long term borrowing with long term deposits. And in most cases the pension funds simply keep rolling over the bonds as they mature.

Jim

This really is a very interesting series of posts. Thank you very much. It really challenges the way we think about mortgages, and indeed, about home ownership, in Ireland.

This is the bit I am most fascinated by

- can meet 20% of the market value (100K) in demonstrable savings
- mortgage must be reduced to 67% by retirement age

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1) Where does the 67% come from? Is that in law or is it just a guideline?
2) Using your example, I presume that means that HJ finances to mortgage as follows
So HJ hits 65 and still has a mortgage of 335k on which he pays interest.

This would seem odd to the Irish as a house-owning nation, but it would not be odd to a nation of renters. If most 65 year olds are paying rent, they wouldn't see any issue in another 65 year old paying interest. In Ireland, we seem to think that people shouldn't have any accommodation costs in terms of rent or interest after the age of 65.

Would a typical 55 year old house owner in Switzerland have a 70% mortgage and a fair amount of savings and investments at the same time? Would they not be better off paying off their mortgage as people would generally be advised to do in Ireland?

If I have 35% of the house price at the start, will the bank give me an indefinite interest-only loan? They will never ask for capital repayments?

- You inherit the charge documents with the property and can use them to obtain a new mortgage to pay off the mortgage provider of the pervious owner

- If you sell the property you can pass on the charge documents to the new owner and he can use them to obtain a new mortgage

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What happens when my father dies and leaves me a 500k property with a 335k interest-only mortgage?

Presumably the bank must be satisfied with my capacity to pay the interest on the mortgage? If I am on a very low income, is the house just sold and the mortgage repaid?

Do they think of mortgages as inter-generational?

That is all for now, but I have lots more

It is all a very interesting concept and I am sure there are elements of this that be could be applied to some of the current mortgage problem. I honestly think that we should legislate for verifiable savings of 20% deposit before being granted a mortgage.

Brendan Burgess said:

1) Where does the 67% come from? Is that in law or is it just a guideline?

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We are currently experiencing a building boom over here and as in Ireland the banks started to do the 100% mortgages etc... so the Government moved quickly to make the requirements law as opposed to tradition. So right now they are legal requirements.

Brendan Burgess said:

In Ireland, we seem to think that people shouldn't have any accommodation costs in terms of rent or interest after the age of 65.

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Here the view is that all that has changed is your source and level of income. Everything else remains the same, including the obligation to pay taxes!

Brendan Burgess said:

Would a typical 55 year old house owner in Switzerland have a 70% mortgage and a fair amount of savings and investments at the same time? Would they not be better off paying off their mortgage as people would generally be advised to do in Ireland?

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Yes the typical 55 year old house owner would the house plus an investment portfolio. In fact most 55 years olds will have an investment portfolio as the Swiss prefer that to a house and of course we don't pay any taxes on capital gains arising out of investing....

Brendan Burgess said:

If I have 35% of the house price at the start, will the bank give me an indefinite interest-only loan? They will never ask for capital repayments?

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Yes the banks are never particularly concerned about capital payments as long as you keep paying the interest, which is 100% deductible for tax purposes - there is no cap.

Brendan Burgess said:

What happens when my father dies and leaves me a 500k property with a 335k interest-only mortgage?

Presumably the bank must be satisfied with my capacity to pay the interest on the mortgage? If I am on a very low income, is the house just sold and the mortgage repaid?

Do they think of mortgages as inter-generational?

That is all for now, but I have lots more

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Maybe the first thing to consider is that because most people tend to rent they home rather than own it, they are very mobile and tend to live close to their place of work. As a result it is no so common for people to want to move into the family home, so in most cases it will be sold, the mortgage paid off and the remainder of the estate distributed among the children.

If someone did want to move into the home, then they would need to satisfy the bank in the normal way for a mortgage, except that there would be no requirement to have the 20% savings.

The mortgage system in Switzerland - Ideas Worth Considering

Borrower Side
The strong attitude to ensuring that the borrower is going to be in a position to meet their payment commitments is very well worth considering.

Interestingly enough both borrowers and renters use the 30% rule went considering how much they are paying for accommodation. Even renters have a hard time justifying to themselves in going above 30% for rentals.

Lender Side
Overhauling the pension system and placing a large property requirement there would mean that a long term source of financing could be matched to a long term source of borrowing as opposed to the current situation. It would also mean that there would a large number of rental options available so that families would have an alternative to having to buy their own home.

Jim2007 said:

We are currently experiencing a building boom over here and as in Ireland the banks started to do the 100% mortgages etc... so the Government moved quickly to make the requirements law as opposed to tradition. So right now they are legal requirements.

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We have a lot to learn from the Swiss!

Brendan Burgess said:

We have a lot to learn from the Swiss!

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In this case it was the other way around, we saw what happened in Spain and Ireland, so it was easy for the government to justify the move. Also of course because home ownership is not such a big deal over here there was little opposition to the move.

Jim2007 said:

- can meet 20% of the market value (100K) in demonstrable savings

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I have a swiss mortgage (joint mortgage with husband) whats interesting about this was that we went to buy a house for 700k and asked for a mortgage. We had a deposit for this. However the bank valued the house at 620k based on an equation they use; type of house, no. of rooms, area, amenities, age, condition of property, number of dogs on the road (joking about the dog) - so eventhough we have good salaries, a good deposit (20 percent of 700k) we only got a mortgage for 620k.

One advantage of this is it prevents bidding wars on houses as most parties will only get the mortgage for the bank perceived value and not the bidder value.

casiopea said:

I have a swiss mortgage (joint mortgage with husband) whats interesting about this was that we went to buy a house for 700k and asked for a mortgage. We had a deposit for this. However the bank valued the house at 620k based on an equation they use; type of house, no. of rooms, area, amenities, age, condition of property, number of dogs on the road (joking about the dog) - so eventhough we have good salaries, a good deposit (20 percent of 700k) we only got a mortgage for 620k.

One advantage of this is it prevents bidding wars on houses as most parties will only get the mortgage for the bank perceived value and not the bidder value.

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Thanks for the reminder. Yes in most cases property is valued on a long term concept as opposed to the current market value. It is also the same for wealth tax.

The only problem with this concept is that it can be come very theoretical if it is not in an existing residential area. But in general it works well.

Jim2007 said:

Wealth Tax
Here we pay a vary low wealth tax on all our assets, including the home, so owning a house would increase your wealth tax by perhaps a few hundred Francs.

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Actually our wealth tax works out in the thousands rather than hundreds and the wealth tax is at both federal and kanton level (we are submitting the taxes this week so Ill double check the actual percentage but roughly we pay about 22 % tax of which 4% is wealth). As Jim2007 said somewhere above, certain activities that are perceived to maintain the value of the property are tax deductable against the wealth tax so for example - new windows, insulation, maintenance of the structure, painting and maintenance of the exterior. However something like a new kitchen or carpets etc is not. Also it makes your annual tax submission a bit of nightmare as everything has to be accounted, documented and ideally photographed, but we are slowly renovating this house over the years to benefit from this.

The threads happening now on LPT are very interesting as we pay LPT over here (the wealth tax). But we dont pay a stamp duty on purchase of the property.

I do think people at home who paid stamp duty should be allowed count some it against the new LPT (ie paid for the first x no. years in form of stamp duty) and that would be fairer then for those in negative equity, who paid a tax (stamp duty) on properties with unrealistically high values and hence high stamp duty.

Also I think LPT should consider the tax - free renovation idea maintaining the property

casiopea said:

Actually our wealth tax works out in the thousands rather than hundreds and the wealth tax is at both federal and kanton level (we are submitting the taxes this week so Ill double check the actual percentage but roughly we pay about 22 % tax of which 4% is wealth).

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In an earlier post I mentioned how the taxation can vary from community to community and this is a typical example! I pay an effective rate of about 27%, but less than 1% of it is on wealth taxes. We both would pay at the same rate for the Federal taxes, but obviously the kantons and communities of Bern and Zurich have different opinions on how local taxes should be collected.

casiopea said:

As Jim2007 said somewhere above, certain activities that are perceived to maintain the value of the property are tax deductable against the wealth tax so for example - new windows, insulation, maintenance of the structure, painting and maintenance of the exterior. However something like a new kitchen or carpets etc is not. Also it makes your annual tax submission a bit of nightmare as everything has to be accounted, documented and ideally photographed, but we are slowly renovating this house over the years to benefit from this.

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Again here, what is allowed and what is not can vary from place to place and even the documentation requirements. For instance in our community they want to encourage the use of renewable energy, so at the moment the installation of solar panels is considered maintenance where as say the switch from oil to gas is considered an enhancement....

All this means that taxation plays a big part in people deciding where they will live and weather to rent or buy a home. For example, a single person with minimum allowances can have an effective tax rate from between say 19% and 39% depending on where they live!

Back to the issue of the 65% mortgage.

Say I buy a house for 100k at age 50 with in indefinte interest only mortgage of 65k and a 15k annuity mortgage. What happens if prices increase? Can I replace what is left of my annuity to an interest-only as the combined is now less than 65%?

Conversely, if I have a 65% mortgage but house prices fall, do I have to start repaying capital?

I gather though that their use of long term value probably makes these questions less relevant.

Brendan Burgess said:

Back to the issue of the 65% mortgage.

Say I buy a house for 100k at age 50 with in indefinte interest only mortgage of 65k and a 15k annuity mortgage. What happens if prices increase? Can I replace what is left of my annuity to an interest-only as the combined is now less than 65%?

Conversely, if I have a 65% mortgage but house prices fall, do I have to start repaying capital?

I gather though that their use of long term value probably makes these questions less relevant.

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As you say, the long term value is the key here. For example in the case of my own house, the change in the long term value has been due almost exclusively to enhancements we have done to the property. So it is unlikely that the case would arise, if it did I would expect that it is possible, but you would still have to meet the 30% rule.

You also have to keep in mind the mentality of the people - their objective is to get out of debt as soon as possible, so if anything they will be even further below the 67% cut off point when they reach retirement age.