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Old 26.04.2021, 14:47
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Mortgage

Hello!

I apologize for creating another thread on this subject: I would like to clarify a few nuances.

As I understand a mortgage loan is typically split into,
- the down payment (20% whereas up to 10% can be from the pension fund)
- a loan smaller part with a higher interest rate (1)
- a loan larger part with a lower interest rate (2)

As I understand (1) is obligatory to be paid off while many (most?) people only pay the interest rate on (2).

Most articles / videos tend to fallback to describing why paying only the interest rate on (2) is beneficial (essentially because the money can be invested better).

However, I am very curious about nuances such as,
- what does happen to a property in general if a loan-taker is unable / unwilling to continue paying the loan - is it always allowed to sell a property (provided that its market value is okay) and return to the bank the unpaid amount, in other words, to split a property between a bank and a loan taker? Or in such event the bank gets to own the whole property unconditionally? In case such a "split" is possible, is bank only interested to get the remaining amount back, or it gets % from a property current market value owned by it?
- how do those who choose to be paying the interest rate only indefinitely plan their future, particularly I mean the age when their income becomes much less: throughout their lives they are simply investing these money in a better way but not spending them in order to repay the entire loan at some point? or they plan to pass it over to their children - is a loan inheritable? or they are planning to do some sort of a "split" - something like I described above and then move somewhere more affordable?
- also, I've heard about the possibility of paying of the mortgage through the 3rd pillar where it serves as a sort of a proxy (smth like: a loan taker transfers money to the 3rd pillar and the bank gets the money from there once in a while, the whole scheme allows to reduce the tax burden) - could someone please share more info on this?
- and, finally, could you please recommend a mortgage calculator that is capable of assuming that the whole mortgage is naively to be paid off

I apologize that my questions are probably very basic.
Thank you in advance.
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Old 26.04.2021, 15:30
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Re: Mortgage

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Hello!

I apologize for creating another thread on this subject: I would like to clarify a few nuances.

As I understand a mortgage loan is typically split into,
- the down payment (20% whereas up to 10% can be from the pension fund)
- a loan smaller part with a higher interest rate (1)
- a loan larger part with a lower interest rate (2)

As I understand (1) is obligatory to be paid off while many (most?) people only pay the interest rate on (2).

Most articles / videos tend to fallback to describing why paying only the interest rate on (2) is beneficial (essentially because the money can be invested better).

However, I am very curious about nuances such as,
- what does happen to a property in general if a loan-taker is unable / unwilling to continue paying the loan - is it always allowed to sell a property (provided that its market value is okay) and return to the bank the unpaid amount, in other words, to split a property between a bank and a loan taker? Or in such event the bank gets to own the whole property unconditionally? In case such a "split" is possible, is bank only interested to get the remaining amount back, or it gets % from a property current market value owned by it?
- how do those who choose to be paying the interest rate only indefinitely plan their future, particularly I mean the age when their income becomes much less: throughout their lives they are simply investing these money in a better way but not spending them in order to repay the entire loan at some point? or they plan to pass it over to their children - is a loan inheritable? or they are planning to do some sort of a "split" - something like I described above and then move somewhere more affordable?
- also, I've heard about the possibility of paying of the mortgage through the 3rd pillar where it serves as a sort of a proxy (smth like: a loan taker transfers money to the 3rd pillar and the bank gets the money from there once in a while, the whole scheme allows to reduce the tax burden) - could someone please share more info on this?
- and, finally, could you please recommend a mortgage calculator that is capable of assuming that the whole mortgage is naively to be paid off

I apologize that my questions are probably very basic.
Thank you in advance.
1. If you default on the loan the bank can take the property and sell it; this does not necessarily clear the loan in full in which case you are still liable for the remainder, although in practice that's why they only lend max 80% to avoid this situation.

2. The loan can usually be taken over by the inheritors if they are suitable for the bank, or the property can be sold to pay off the remaining loan. I guess many/most people assume this will be the situation.

3. The bank can't take money from the 3a but it serves as a guarantee that enough money is being saved to pay the mortgage down to 60% on retirement.

4. Probably not in Switzerland, it isn't a common thing.
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Old 26.04.2021, 15:39
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Re: Mortgage

Also note that the 80% will be based on what the bank thinks the property is worth, not on the sellers asking price.

If the bank thinks the property is worth 800k and the seller is asking 1,000k don’t expect to be able to borrow more than 640k. Sad but true and in a seller’s market you need to be aware of this.
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Old 26.04.2021, 15:56
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Re: Mortgage

Also your income be calculated as to
- 1/3 of your income (butto) should be the maximum for mortgage + hausing costs ...

however mortgage is taken with 5% ir for that calculation and other (maintenance) costs is 1% or 2%

so at 1m CHF mortgage -> you'd be expected to have 70k to fulfil banks borrowing rules and would mean minimum income you'd need to have is ±210k (fixed) per year.

on top you'd need to get your mortgage down to 65% until you reach retirement age so that is another thing.
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Old 26.04.2021, 16:12
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Re: Mortgage

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Also your income be calculated as to
- 1/3 of your income (butto) should be the maximum for mortgage + hausing costs ...

however mortgage is taken with 5% ir for that calculation and other (maintenance) costs is 1% or 2%

so at 1m CHF mortgage -> you'd be expected to have 70k to fulfil banks borrowing rules and would mean minimum income you'd need to have is ±210k (fixed) per year.

on top you'd need to get your mortgage down to 65% until you reach retirement age so that is another thing.
No bank I've dealt with use 2% for maintenance; for a 1m mortgage they would probably use between 0.75% and 1% so your total gross income would have to be:

1m * 5.75% * 3 = 172k
to
1m * 6% * 3 = 180k

Also it doesn't have to be "fixed" - if you can show a reliable recurring bonus they will accept that to some degree.
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Old 26.04.2021, 16:54
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Re: Mortgage

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No bank I've dealt with use 2% for maintenance; for a 1m mortgage they would probably use between 0.75% and 1% so your total gross income would have to be:

1m * 5.75% * 3 = 172k
to
1m * 6% * 3 = 180k

Also it doesn't have to be "fixed" - if you can show a reliable recurring bonus they will accept that to some degree.
Aren‘t you missing the amortisation (which is generally 1% pa)?

OP if you to work out the monthly cost of a fully amortising mortgage just use something like eFunda‘s loan calculator.
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Old 26.04.2021, 18:45
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Re: Mortgage

Thank you for your responses, I will write a cumulative reply asking some additional questions.

- Let's narrow down to a situation that 200k are left to pay to the bank, and the market value of a property is one 1mio. Is there a possibility to quit gracefully e.g. sell the property, give 200k to the bank and take remaining 800k (assuming that we ignore taxes, provisions etc)? I know there could be better workarounds such as renting out the estate, for example, but I am specifically curious about this most basic "dumb" scenario?
- If we put aside that paying off the mortgage is not considered wise in Switzerland, is there a preferred way to pay it off? Is an obligation to accumulate funds on the 3rd pillar one of such strategies (I am guessing from one of your responses).
- As I am deducing from one of your responses the typical way to go about it is to default at pension age, so the house goes back to the bank to compensate the remaining loan, and the down-payment + the smaller loan are lost essentially. How come is it still beneficial to be paying the interest rate only if about 35% are burned like so in the end? I mean, it isn't that trivial to earn that much or more than that with remaining 65% over time? Or it is just the mentality that people do not bother with owning things?
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Old 26.04.2021, 19:04
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Re: Mortgage

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No bank I've dealt with use 2% for maintenance; for a 1m mortgage they would probably use between 0.75% and 1% so your total gross income would have to be:

1m * 5.75% * 3 = 172k
to
1m * 6% * 3 = 180k

Also it doesn't have to be "fixed" - if you can show a reliable recurring bonus they will accept that to some degree.
None of the big ones would count bonuses - at best after long history they'd take 50% of bonus into account . After 5-years history with the bank - you may have that up but not much.

There is also costs they'd factor as family size (dependants) and couple other things .

closer your mortgage to 65% of total value - more open banks be to "relax some of the limitations" but that's just cause risk is mitigated by property value.
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Old 26.04.2021, 19:11
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Re: Mortgage

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Thank you for your responses, I will write a cumulative reply asking some additional questions.

- Let's narrow down to a situation that 200k are left to pay to the bank, and the market value of a property is one 1mio. Is there a possibility to quit gracefully e.g. sell the property, give 200k to the bank and take remaining 800k (assuming that we ignore taxes, provisions etc)? I know there could be better workarounds such as renting out the estate, for example, but I am specifically curious about this most basic "dumb" scenario?
- If we put aside that paying off the mortgage is not considered wise in Switzerland, is there a preferred way to pay it off? Is an obligation to accumulate funds on the 3rd pillar one of such strategies (I am guessing from one of your responses).
- As I am deducing from one of your responses the typical way to go about it is to default at pension age, so the house goes back to the bank to compensate the remaining loan, and the down-payment + the smaller loan are lost essentially. How come is it still beneficial to be paying the interest rate only if about 35% are burned like so in the end? I mean, it isn't that trivial to earn that much or more than that with remaining 65% over time? Or it is just the mentality that people do not bother with owning things?
No graceful exit there - you pay interests till end of the term as you'd still have that mortgage ( fixed terms ) or anything that your variable mortgage conditions are.
- you may sell hause with a mortgage and than it costs you 0.
- you may terminate mortgage at any time but you pay remaining interests and some fee
- you may end variable at the term
- there is window when you may overdo on mortgage when you selling house and it wont end exactly at the term - there is overnight costs that your banks may count for that service.

Paying mortgage is wise - until you can invest cash better - and at 1% current interest rates that may be a case for some but not all.

Never heard of defaulting at any age - you may want to sell property as likely value is much higher than at the time of purchase ( there is heavy tax for buy&sell at profit - so 10-years is the term to hold to property to not to be hurt there) - or keep it assuming your pension allows you to cover for the interests . There may be reverse mortgages however I wouldn't know.

hope that helps
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Old 26.04.2021, 19:49
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Re: Mortgage

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- you may sell hause with a mortgage and than it costs you 0.
Thank you for your reply!

How does selling a house with a mortgage look like exactly?

For example, there is a 1mio house with 200k remaining unpaid, and this house is sold with this mortgage.

What does it leave a selling party (the original loan taker). With zero? Or with 800k before any fees?
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Old 26.04.2021, 20:08
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Re: Mortgage

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Thank you for your reply!

How does selling a house with a mortgage look like exactly?

For example, there is a 1mio house with 200k remaining unpaid, and this house is sold with this mortgage.

What does it leave a selling party (the original loan taker). With zero? Or with 800k before any fees?
from side of mortgage owner - it saves termination and remaining interest fees while for the new owner it may be financialy interesing (as terms remains as-was) so should interest rates go up - purchasing hause with lower interst rates is profitiable to both sides.

- take 10y fixed with 1% for 1m and you need to move on and want to sell just after 2-years into the contract. Bank would ask you to pay (simple but close enough) 8x1% -> 8% of the property value so bank could still earn the money even when not lending any money.

On the other hand whoever would take over property may very well buy it with your mortgage and pay it himself for 8-years . Often you may condition sell of the hause against mortgage take over (or explain raise in price).

when you have 80% in property and just 20% is mortgage - when you sell at 100% of the price -you get 80% onto your account and you don't care , as your bank is going to make sure they get 1m from that sell .
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Old 26.04.2021, 20:09
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Re: Mortgage

When the house is sold, the bank takes what it is owed and you get the rest. The bank will also take fees which may include early break up fee.
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Old 26.04.2021, 20:12
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Re: Mortgage

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Thank you for your reply!

How does selling a house with a mortgage look like exactly?

For example, there is a 1mio house with 200k remaining unpaid, and this house is sold with this mortgage.

What does it leave a selling party (the original loan taker). With zero? Or with 800k before any fees?
You sell the house with the agreement that the buyer assumes your 200k mortgage. The buyer also pays you 800k. Often the buyer will negotiate with your bank to amend your mortgage giving them the necessary funds.
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Old 26.04.2021, 20:17
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Re: Mortgage

Alternatively if you move within Switzerland you can take your mortgage with you and avoid fees...
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Old 26.04.2021, 20:50
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Re: Mortgage

Thank you for your responses, I think I've mostly understood it and I guess I will be able to ask more specific question to a consultant once I am eligible
If you know any worthy books or articles on the subject particularly related to Switzerland please share.
Have a nice evening.
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Old 26.04.2021, 20:56
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Re: Mortgage

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Alternatively if you move within Switzerland you can take your mortgage with you and avoid too manyfees...
ftfy
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Old 26.04.2021, 21:10
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Re: Mortgage

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None of the big ones would count bonuses - at best after long history they'd take 50% of bonus into account . After 5-years history with the bank - you may have that up but not much.

There is also costs they'd factor as family size (dependants) and couple other things .

closer your mortgage to 65% of total value - more open banks be to "relax some of the limitations" but that's just cause risk is mitigated by property value.
That's why you don't get a mortgage from the big ones.
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Old 26.04.2021, 21:26
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Re: Mortgage

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You sell the house with the agreement that the buyer assumes your 200k mortgage. The buyer also pays you 800k. Often the buyer will negotiate with your bank to amend your mortgage giving them the necessary funds.
But be careful here regarding the rate - when we bought our house the existing mortgage was on a poor rate. When we worked out the difference between what we could get and what the existing one would cost it worked out cheaper for the current owner to pay off the mortgage (the penalty was not as much as the full interest due over the remaining term).

But this took some considerable spreadsheet work and discussion to confirm.

Also if you are relatively near your borrowing limit, the bank you choose may be important (i.e. see comments on the inflexibility of big banks vs cantonal banks).
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Old 26.04.2021, 21:34
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Re: Mortgage

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Also if you are relatively near your borrowing limit, the bank you choose may be important (i.e. see comments on the inflexibility of big banks vs cantonal banks).
Thanks! Which ones are considered more flexible? Also, is your own bank trusting you more than others normally, or it is irrelevant completely?
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Old 26.04.2021, 21:40
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Re: Mortgage

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Thanks! Which ones are considered more flexible? Also, is your own bank trusting you more than others normally, or it is irrelevant completely?
I can only speak for three - UBS were totally inflexible, SGKB were very flexible, and Bank Linth were somewhere in between.

Being an existing customer probably doesn't make any difference. Actually I've usually found that other banks are more interested in getting your business than your current one is in keeping it.
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