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Old 09.01.2017, 16:17
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Mortgage tips and risks

The parents of a close friend of mine are retired. They want to help her buy a flat. They are willing to give 300'000. So far they have been looking for something cheap around 600'000. But with this money you get a flat outside Zurich, nothing nice.

I was thinking if, with the current low interest rates, it would be wise to buy a flat for 1'000'000 and take a fixed mortgage for 15 years. I do not want to advise her something risky. But I thought that having a mortgage, you can use the tax deductions and benefit from the low fixed rate. If, in 15 years, extending the mortgage would become too expensive, you would be able to pay it off, even with an average salary.

Could you let me know your opinion on this? Are there any caveats to consider? One problem I am aware of is the Tragbarkeit. The bank will not give out a loan based just on her income. The question is, can she take the mortgage together with her parents? Regarding background, they are Swiss, and they are typical risk averse people, meaning their savings are sitting on the Sparkonto.
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Old 09.01.2017, 16:47
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Re: Mortgage tips and risks

There's a big risk of margin call. If house prices drop and the mortgage debt gets to be above 80% of the property's valuation, the bank can ask you to cough up more capital or sell, no matter how many years your fixed mortgage still has to run for.

In the last big swiss housing bubble the prices dropped by 30% or so. Should that repeat, you need to be prepared to put on the table roughly 30%*80% = 24% of the price in cash to complement your initial 20% downpayment.

A disadvantage of the extremely long running fixed mortgages like 15 years is that you'll usually pay very heavy penalties, should the circumstances change and you'd need to sell the house and get rid of it. Mortgage won't not stop if they die, it'll get inherited with the house.

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One problem I am aware of is the Tragbarkeit
It's just a formal limit to how much cash the bank is allowed to loan out based on income.

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The bank will not give out a loan based just on her income. The question is, can she take the mortgage together with her parents?
If she would be a co-owner of the property, I think that should work. Ask the banks.
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Old 09.01.2017, 16:57
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Re: Mortgage tips and risks

How will the parents give thir daugther the 300k? As a gift or as a loan?
If as a loan I do not think it will count toward the needed 20% self financing. Means the girl as to bring in 200k on her own, wheras as a maximum of 10% of the purchase value can come from pillar 2.

So we are either at a 500k or a 700k mortgage.

Unfortunatly, until now the Tragbarkeit is calculated based on a 5% interest (25k or 35k), on 1% maintenance cost (10k), and amortisation down to 66% (0 or 2.7k)

This should not be more than 1/3 of the income.
Means she must either earn 105k or 144k.
It may be that if the parents act as a fully liable guarantor (Surety/Bürgschaft) that the income can be lower.

If she gets the loan it is very advisable to safe the difference between the actual mortgage interest and the hypotheical 5% and not use it for an easy, simple, happy life. Because, after 15 years when the mortgage is up you may need this money to knock down the loan. In 15 years it should be possible to save up 400k.
With this you can lower the mortgage either to 100k or 400k and still aford to the loan even if interest rose to a now ubelievable 7%.

Raifaisen want's to intruduce a new caluclation which is suspect to apporval by FINMA.
http://www.nzz.ch/wirtschaft/neue-si...raus-ld.128918
In this caculation a 3% interest is used for a ten year mortgage and the amortization of loan is much higher. Exactly that you have a much lower total dept in ten years and you could afford an interest hike.
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Old 09.01.2017, 17:06
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Re: Mortgage tips and risks

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How will the parents give thir daugther the 300k? As a gift or as a loan?
If as a loan I do not think it will count toward the needed 20% self financing. Means the girl as to bring in 200k on her own, wheras as a maximum of 10% of the purchase value can come from pillar 2.
Not sure of the details but there is also something called a Bürgschaft. It means that you can underwrite somebody else's loan and thus accept that if the person you are helping defaults, the bank can come after you and your assets. The bank can ask you to prove you have the wealth to cover such a case. It thus helps if the person taking on the Burgschaft also owns a property and has a mortgage with the same bank. It also helps if the person is a direct family member as this makes things simpler in case of death/inheritance.
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Old 09.01.2017, 18:14
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Re: Mortgage tips and risks

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There's a big risk of margin call. If house prices drop and the mortgage debt gets to be above 80% of the property's valuation
How does this work? Do they regularly approximate the value of my property? How reliable is this?

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you need to be prepared to put on the table roughly 30%*80% = 24%
So let's run the numbers. Capital of 200, Mortgage 800. Flat value goes down from 1000 to 700 (who calculates that and how?). LTV is now 114%. We raise the capital by 240, the mortgage is now 560, LTV again 80%. Correct?

Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates? What was the cause last time?

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A disadvantage of the extremely long running fixed mortgages like 15 years is that you'll usually pay very heavy penalties
Understood. But what is a realistic scenario that would force you to sell? Even if you can't afford to pay the interest anymore, you just move somewhere cheap and rent that expensive flat to someone else.

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If she would be a co-owner of the property, I think that should work. Ask the banks.
would the pension of parents count as a valid income? Is their advanced age not an issue?

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How will the parents give thir daugther the 300k? As a gift or as a loan?
Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?

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Means she must either earn 105k or 144k.
She has a lower salary than that. I was thinking maybe the parents can use their pension for the Tragbarkeit?

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If she gets the loan it is very advisable to safe the difference between the actual mortgage interest and the hypotheical 5% and not use it for an easy, simple, happy life
Yes of course. I was already calculating that, not having to pay the rent, she could save about 40'000 per year. That's 600'000 after 15 years.
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Old 09.01.2017, 18:26
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Re: Mortgage tips and risks

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How does this work? Do they regularly approximate the value of my property? How reliable is this?
If with reliable you mean accurate, not very accurate. The accurate value of a property is a fluffy concept anyhow. If somebody desperately wants to buy, they will overpay, but people are also selling below value because time isn't on their side..

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Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates? What was the cause last time?
If interest rates pick up, I can definitely see prices slide. The general state of the economy / employment is also an important factor. Nobody has a crystal ball.

Another factor that affects prices is the tax rate of the Gemeinde. Some Gemeindes lower taxes to attract richer people and this pushes up property prices. But sometimes Gemneindes also overstretch themselves and may need to put taxes back up with the inverse effect.

But independently of cause, if she is putting in 300 K in cash (plus whatever she has saved up herself), prices would have to slide quite significantly before there was an equity problem.

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Understood. But what is a realistic scenario that would force you to sell? Even if you can't afford to pay the interest anymore, you just move somewhere cheap and rent that expensive flat to someone else.
Rules on mortgages are different if you don't inhabit yourself. For example if you're taking money out of your second pillar, you would be forced to pay that back if you moved out.

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would the pension of parents count as a valid income? Is their advanced age not an issue?
I think that's a question for the bank. Some banks have different sets of conditions for pensioners.

You also have to consider, if push comes to shove and the bank come knocking on the parent's door and asking for a big chunk of their savings / assets, would your friend want her parents to live their last years in poverty just because she mis-speculated on her appartment?

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?
I think you do pay tax if you receive a large present like that. But being parents maybe not. I'd talk to a tax consultant. Does she have siblings? If yes, then possibly the parents can't actually leave such a large chunk of their estate to one daughter alone.
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Old 09.01.2017, 18:39
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Re: Mortgage tips and risks

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I think you do pay tax if you receive a large present like that. But being parents maybe not. I'd talk to a tax consultant. Does she have siblings? If yes, then possibly the parents can't actually leave such a large chunk of their estate to one daughter alone.
No need for a consultant which charges a hefty fee. Just look it up in the tax code of the parents canton.

Or use this handy calculator.
https://www.bkb.ch/de/Service-Center...Steuern-sparen

PS: If the parents live in Canton Zurich the tax is 0.
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Old 09.01.2017, 18:35
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Re: Mortgage tips and risks

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So let's run the numbers. Capital of 200, Mortgage 800. Flat value goes down from 1000 to 700 (who calculates that and how?). LTV is now 114%. We raise the capital by 240, the mortgage is now 560, LTV again 80%. Correct?
Correct.

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How does this work? Do they regularly approximate the value of my property? How reliable is this?


Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates? What was the cause last time?
They will do it once the house prices have considerably dropped. They will do it based on what the house/apartment is worth at that day. Same as they do it now. They could already today say your 1M house is overpriced and only worth 900k.

My bet on the actual cause? A cancellation of the bilateral agreement with the EU which causes a relocation of many multinationals and its workforce out of Switzerland with the result of lot of unneeded housing. Read up on what happened in the 1970ies.
http://www.eso.uzh.ch/modul2/9.html?...twicklung_3_13

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Understood. But what is a realistic scenario that would force you to sell? Even if you can't afford to pay the interest anymore, you just move somewhere cheap and rent that expensive flat to someone else.
Your job moving aboard and no replacement job in Switzerland.
If many people have to sell, because of too high interest or no longer a job, and no one buys prices drop. IF interest rises so will rent.

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?
Tax depends on the canton. In some cases gifts are treated like inheritances and are tax free when from parents to children.

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would the pension of parents count as a valid income? Is their advanced age not an issue?
She has a lower salary than that. I was thinking maybe the parents can use their pension for the Tragbarkeit?
You have to discuss this finer details with the institute which will give the mortgage.

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Yes of course. I was already calculating that, not having to pay the rent, she could save about 40'000 per year. That's 600'000 after 15 years.
That's perfect. Two things: Must be a nice flat for so much rent saved. It may be hard not to touch the money.
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Old 09.01.2017, 18:38
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Re: Mortgage tips and risks

Can't she get an appointment at her bank to ask someone there for an educated opinion of her financial situation rather than asking a bunch of weirdos here?
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Old 09.01.2017, 18:45
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Re: Mortgage tips and risks

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My bet on the actual cause? A cancellation of the bilateral agreement with the EU which causes a relocation of many multinationals and its workforce out of Switzerland with the result of lot of unneeded housing. Read up on what happened in the 1970ies.
http://www.eso.uzh.ch/modul2/9.html?...twicklung_3_13
I don't think multinationals moving away will have such a massive direct effect on the real estate market. Many expats are on short term contracts and thus not owning property. Those that aren't are probably over represented in higher income categories and thus not competing for an appartment in the price range you mention.

What may have a far bigger effect is the exchange rate. The EUR going from around 1.60 to around 1.10 has put enormous pressure on exporting companies and made it easier for imports. One reason the CHF is so strong is that people from across Europe and the world see it as a safe haven in uncertain times. Even if they are just stashing 1000 CHF notes under their mattress. And those uncertain times are not over yet. If the exchange rate slips further we may see many companies go broke or move out of Switzerland. This will lead to higher unemployment and will bring down the property market.
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Old 09.01.2017, 18:40
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Re: Mortgage tips and risks

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How does this work? Do they regularly approximate the value of my property? How reliable is this?
Each bank probably has their own valuation methodology and own figures. Under normal market conditions, property slowly appreciates and they don't need to do anything. Only a large market-wide drop in prices should force the bank to take a closer look at their portfolio of mortgage debts and make the calls where necessary. You can check housing prices indexes, like ZKB's https://www.zkb.ch/de/pr/pk/finanzie...ndex-zwex.html, to monitor when there's a downwards trend.

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So let's run the numbers. Capital of 200, Mortgage 800. Flat value goes down from 1000 to 700 (who calculates that and how?).
The bank according to their own methodology.

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LTV is now 114%. We raise the capital by 240, the mortgage is now 560, LTV again 80%. Correct?
Yes, if you can pay 240k, that should satisfy the bank.

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Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates?
A big increase in interest price would affect the prices, yes.

For example at a 5% mortgage interest, current prices aren't very sustainable. You only make 3-5% currently in net rent (post NK), out of which you still have to pay maintenance, taxes, mortgage and keep some as a profit.

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax?
If they give the money to her as a gift, it would be free of tax as a gift between parents and children. But this money would just reduce the amount she'd need to loan. She still needs to have enough income to afford to loan the remaining amount.

If they would co-own or sign up to be the guarantors, I guess their pension income can be considered by the bank in addition to the daughter's for the Tragbarkeit calculation.
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Old 10.01.2017, 11:47
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Re: Mortgage tips and risks

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?
The debt situation may still be worth taking a closer look:

There's that thing called Solidarhaftung, Solidarschuldner. What it means is that the parents join the child as s debtor WRT to the mortgage, every Solidarschuldner can be held liable for the full debt. Generally speaking the bank should be interested in such an arrangement as two debtors lower its risk; the benefit for the child, and this is a guess, may be that the parent's income may become usable for the affordability calculation for the child. It may be useful to ask multiple banks.

As odd as it may sound, but one thing to mind with fixed-rate long-term mortageges is the creditor's debt quality:
If the bank goes bankrupt the credit comes due immediately. If that were to happen after interest rates have risen, your friend may need to pay more after refinancing with a different bank. Bankruptcy is near-impossible for most Kantonalbanken because most (I think there are three exception) are protected by Staatsgarantie, i.e. the respective Kanton guarantees the respective bank's debts. So assuming comparable conditions, your friend will proabably want to get the mortgage from a Kantonalbank. I guess the risk is very small but perhaps better be safe than sorry.

Another issue will be to get an overview over currently offered interest rates. The newspaper "Finanz und Wirtschaft" (the local equivalent to the Wallstreet Journal) periodically (once a month I think) publishes a short overview and recent trends plus their short-term outlook; this old article shows what you can expect, I think the article is part of the front page.The paper is available at most not-too-small kiosk, it's published on Wednesdays and Saturdays.
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The risk of cancelling the bilaterals seems to have abated, but another risk not really considered by many is the impact of the trend against tax avoidance and the pressure put on CH by the EU. Without a favourable enough tax regime, some multi-nationals will leave for cheaper countries.
Also cue the national vote next month on corporate tax reform, Unternehmenssteuerreform III.
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Old 10.01.2017, 11:59
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Re: Mortgage tips and risks

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I was already calculating that, not having to pay the rent, she could save about 40'000 per year.
Hmm, by owning we save about 13000/year (with 35% down).

How did you get 40000?

Tom
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Old 10.01.2017, 12:15
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Re: Mortgage tips and risks

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I was thinking if, with the current low interest rates, it would be wise to buy a flat for 1'000'000 and take a fixed mortgage for 15 years. I do not want to advise her something risky. But I thought that having a mortgage, you can use the tax deductions and benefit from the low fixed rate. If, in 15 years, extending the mortgage would become too expensive, you would be able to pay it off, even with an average salary.
I have a question on this part of the original post. You mention about paying off the mortgage after 15 years, but (from my limited knowledge of the subject) I understand that in Switzerland it's generally a bad idea to fully pay off a mortgage. The reason is that the tax for fully owning a property is higher than the mortgage payments would be.

Just wondering if someone more knowledgeable could chime in on this. I'm also a home owner and this is what I've been advised.
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Old 10.01.2017, 12:28
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Re: Mortgage tips and risks

Tax (on Eigenmietwert or rent income) and mortgage are totally independent. You always pay tax, mortgage or not, it's not capped or floored by mortgage payments in any way, so no reason to think that two are related.

There's a different tax advantage to mortgage, as well as to any sort of debt in general: it's tax deductible from income taxes. Which essentially means that the effective mortgage rate that you pay post taxes is lower by your marginal income tax rate, and that's all.

It is a very cheap source of a lot of money currently, which you can reinvest far more profitably elsewhere, that's why you might not want to repay.
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Old 10.01.2017, 12:41
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Re: Mortgage tips and risks

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I have a question on this part of the original post. You mention about paying off the mortgage after 15 years, but (from my limited knowledge of the subject) I understand that in Switzerland it's generally a bad idea to fully pay off a mortgage. The reason is that the tax for fully owning a property is higher than the mortgage payments would be.

Just wondering if someone more knowledgeable could chime in on this. I'm also a home owner and this is what I've been advised.
Whether or not it is advantageous to pay off the mortgage is dependent on an individual factors.

In our case we opted to pay off the mortgage, all but a tiny amount just to keep the Schuldbrief alive to facilitate the sale of the house someday.

Our rationale was that living in Steuerparadis (Ausser)Schwyz and carrying the albatross that is the blue passport around our necks there is no real benefit to reducing Swiss taxes. What we save here we just have to pay there - and at the moment I'd rather pay more to Helvetia than Uncle Sam.

We also have limited investment opportunities in Switzerland (that albatross again) so the opportunity cost of using that money to pay off the mortgage rather than invest is not really an issue.

---

One thing every homeowner who carries a large mortgage should look into, though, is 'Tragbarkeit' once you retire. Is your pension enough to still allow that mortgage in the eyes of the bank?

I've heard stories of people who have been asked to make additional payments to bring Tragbarkeit in line with their reduced pension income, but I also know plenty of people whose mortgage carries on as per usual, despite a much reduced income in retirement. There doesn't seem to be a clear consensus as to how this is handled across the board, at least based on anecdotes. But financing in retirement is something to keep an eye on, if only to know where you would stand in a worse case scenario.
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Old 10.01.2017, 12:54
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Re: Mortgage tips and risks

In addition to deducting mortgage interest from your income, the value of your assets is reduced by the amount of the mortgage.

Tom
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Old 10.01.2017, 13:21
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Re: Mortgage tips and risks

Thanks to you all for valuable input. Let me answer some questions that appeared.

She is a real person and not myself . I just know her situation and I, being myself, started wondering and calculating what would be the best option if I was in her place.

When I meant that she can save 40'000 annually, I meant the total, current+potential savings. I hope you will agree, that the savings potential is big. First, if you rent a flat worth 1'000'000, with a rate of 3% you will pay 30'000 annually. With a mortgage of 1% you just pay 10'000, which as I understand you can deduct from your income (another few thousand of tax benefit). Plus, if you plan to pay off the mortgage eventually, you can start making contributions to 3a pillar (another tax benefit).

I know that eventually it would be necessary to meet with a professional. I just wanted to get some general knowledge and opinions before I suggest them this. Then, is it smart to just talk to a bank employee? They just want to sell you the mortgage. Is there a way to find a trusted professional who is obliged to give you proofessional financial advice with your best interest in mind?

Thank you for pointing out all the risks involved. The thing is, currently she is paying a big rent and her parents have the money sitting at the bank. Sure, it's a safe setup, but a lot of lost potential savings, in my opinion. The flat they are willing to pay for would be on the outskirts Winterthur or similar, with a very long travel time to Zurich. The friend will not go for it.

From what I've grasped, it would be best if the parents were co-owners of the flat and if they had some spare savings in case of emergency.

Now how does it work with paying with pillar 2 or 3a for the flat? In order to keep the tax benefit, do you need to be "angemeldet" in there for the rest of your life? I am asking, because one scenario I would consider for her, is to work hard, pay off the mortgage in 15-20 years and then rent out the flat while living in a cheaper country on an early retirement.

Regarding the question: "why pay off?" I am assuming a scenario where there would be no cheap mortgage loan in 15 years. Of course, if you can still get one for 1% then sure, extend it. But I know that a responsible person should save a lot. Then if the money is just on the savings account, I believe it is worse off that being invested in a flat. And I don't see her or her parents investing in stocks or bonds.

Last edited by Meadow; 10.01.2017 at 14:10.
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Old 10.01.2017, 13:56
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Re: Mortgage tips and risks

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Now how does it work with paying with pillar 2 or 3a for the flat? In order to keep the tax benefit, do you need to be "angemeldet" in there for the rest of your life?
Yes, you need to live in the flat after buying to use them. But not for the rest of your life. For pillar 3a, you just need to live at a single point of time. After the bank pays out, there are no strings attached to that money. Pillar 2 is more difficult: it will be written into the land registry books that the money came from pillar 2. If you sell or move out, you're obliged to repay the money back to the pension fund (from sale proceeds if you sell), or work out a deal to carry the funds over to your newly purchased house.

If you leave Switzerland, pension fund's money is supposed to be (almost) fully paid out to you, so I guess you wouldn't have to worry about repaying them and can have the remark removed from the land registry, but ask them in advance how this works before taking the money to be sure.

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Regarding the question: why pay off?
If you cannot or don't want (due to risks) to reinvest the money at a better rate that what you pay for the mortgage.
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Old 10.01.2017, 13:35
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Re: Mortgage tips and risks

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In addition to deducting mortgage interest from your income, the value of your assets is reduced by the amount of the mortgage.
Mortgage has no effect on your taxable wealth. If you pay it out, it's just a zero sum redistribution of your existing wealth. Buying the house will reduce your wealth however, as it's taxable value is usually quite a bit lower (often by 30%) than what you paid for it.

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Our rationale was that living in Steuerparadis (Ausser)Schwyz and carrying the albatross that is the blue passport around our necks there is no real benefit to reducing Swiss taxes. What we save here we just have to pay there - and at the moment I'd rather pay more to Helvetia than Uncle Sam.
Tax advantage of the mortgage is not that big - just your marginal swiss income tax rate. Ignoring it, the current mortgage interest are still highly attractive. You get money at 0.7% and can reinvest say at 5-10% in US stock market.

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We also have limited investment opportunities in Switzerland (that albatross again)
There's no need to stay invested in Switzerland at all with the money you get from the mortgage, as long as you can take the currency risk.

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One thing every homeowner who carries a large mortgage should look into, though, is 'Tragbarkeit' once you retire. Is your pension enough to still allow that mortgage in the eyes of the bank?

I've heard stories of people who have been asked to make additional payments to bring Tragbarkeit in line with their reduced pension income, but I also know plenty of people whose mortgage carries on as per usual, despite a much reduced income in retirement.
Tragbarkeit will come into question only at the point when they have to renew the mortgage. The bank will simply not grant it then without additional amortization to compensate for lost income.

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When I meant that she can save 40'000 annually, I meant the total, current+potential savings. I hope you will agree, that the savings potential is big. First, if you rent a flat worth 1'000'000, with a rate of 3% you will pay 30'000 annually. With a mortgage of 1% you just pay 10'000, which as I understand you can deduct from your income (another few thousand of tax benefit). Plus, if you plan to pay off the mortgage eventually, you can start making contributions to 3a pillar (another tax benefit).
Mortgage is not the only house ownership costs. There's Nebenkosten, heating, maintenance/depreciation and taxes, and they're all rather significant compared to today's sub 1% mortgages. Landlord's profit margin is more like just 20-30% of net rent, the rest goes to cover the above costs. So to have 40k annual savings, you must be currently renting at 40000/12/0.30 = 10k per month or so, as a very rough guess.
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