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Old 05.02.2017, 15:02
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Re: Mortgage in Switzerland

I'd like to bump up this thread because I'm not sure I have fully understood the Swiss Mortgage system. I would show my personal situation:

Currently:
-Renting 75sqm flat
-Monthly rent 2100CHF



Option A - Buy 100sqm flat
-Price: 1,000,000CHF
-Downpayment: 350,000CHF (for ease of calculation)
-Mortgage: 650,000CHF-
-Monthly payment for life 1083CHF (assuming interest of 2%)
-rental income and tax deductions offset each other (roughly)

Option B - Rent 100sqm flat
-rent: 2800CHF

So basically the question is: every month I save 1800CHF with option A, which translates into 21600CHF/year. Hence, If I manage to generate 21600CHF with 350,000CHF, I'm better off with option B, otherwise Option A.

Am I missing something?
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  #42  
Old 05.02.2017, 15:10
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Re: Mortgage in Switzerland

Mortgage is only one of the costs. The other significant costs will be tax, Nebenkosten, maintenance. If you buy a condo, and not the whole house, NK's you'll pay to the building's management will be even higher than for a rented flat because for example you're supposed to contribute to renovation funds and current maintenance of building's common parts - it's illegal to pass such costs onto tenants' NK. Maintanance, renovation, insurance of your own flat will also, of course, be fully up to you and have certain costs.

Mortgages can be had from about 0.7% currently, not 2%. And nobody will guarantee you the rate "for life", typically the longer mortgages here are for 10 years only. But personally I don't think we'll see 2% and higher for a long while.

On the plus side, you forgot about the land price appreciation, which can be a pretty significant hidden source of income with ownership, especially as it's essentially leveraged 3-5x with the mortgage. But it's also a risk - should the house prices drop a lot, expect a call from the bank asking you to cough up cash or sell.

Another plus of ownership is that it's one of the only few ways of how you can liberate your hard earned money from pillar 2/3 schemes.

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-rental income and tax deductions offset each other (roughly)
That's a wrong way to think about it. The correct way is to factor this deduction together with the mortgage, because of the causal relationship between the two - you get deduction solely thanks to the debt alone. I prefer to think of the deduction as a discount on the mortgage rate equal to marginal income tax rate.

Last edited by ivank; 05.02.2017 at 15:38.
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  #43  
Old 05.02.2017, 15:56
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Re: Mortgage in Switzerland

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Mortgage is only one of the costs. The other significant costs will be tax, Nebenkosten, maintenance. If you buy a condo, and not the whole house, NK's you'll pay to the building's management will be even higher than for a rented flat because for example you're supposed to contribute to renovation funds and current maintenance of building's common parts - it's illegal to pass such costs onto tenants' NK. Maintanance, renovation, insurance of your own flat will also, of course, be fully up to you and have certain costs.

Mortgages can be had from about 0.7% currently, not 2%. And nobody will guarantee you the rate "for life", typically the longer mortgages here are for 10 years only. But personally I don't think we'll see 2% and higher for a long while.

On the plus side, you forgot about the land price appreciation, which can be a pretty significant hidden source of income with ownership, especially as it's essentially leveraged 3-5x with the mortgage. But it's also a risk - should the house prices drop a lot, expect a call from the bank asking you to cough up cash or sell.

Another plus of ownership is that it's one of the only few ways of how you can liberate your hard earned money from pillar 2/3 schemes.


That's a wrong way to think about it. The correct way is to factor this deduction together with the mortgage, because of the causal relationship between the two - you get deduction solely thanks to the debt alone. I prefer to think of the deduction as a discount on the mortgage rate equal to marginal income tax rate.
Thanks Ivan,

I have a couple of points to add:
-insurance: whether in a rented flat owned one, this is mandatory, so the costs offset each other
- Rental income/tax deduction: I understand your perspective, but from the wealth standpoint the situation does not change a lot.
-Maintenance is something I haven't factored in. Is it safe to assume 0.5%/year?
-another sunk cost I forgot to mention is the purchasing cost (notary fees, real estate agent etc), which can add up significantly.
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  #44  
Old 05.02.2017, 16:10
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Re: Mortgage in Switzerland

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Thanks Ivan,

I have a couple of points to add:
-insurance: whether in a rented flat owned one, this is mandatory, so the costs offset each other
- Rental income/tax deduction: I understand your perspective, but from the wealth standpoint the situation does not change a lot.
-Maintenance is something I haven't factored in. Is it safe to assume 0.5%/year?
-another sunk cost I forgot to mention is the purchasing cost (notary fees, real estate agent etc), which can add up significantly.
The owner must have buildings insurance, not a renters expense.
Banks assume 1% annual maintenance, with a flat or older house it can be way more.
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  #45  
Old 05.02.2017, 16:15
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Re: Mortgage in Switzerland

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-insurance: whether in a rented flat owned one, this is mandatory, so the costs offset each other
This varies by canton, but usually the only mandatory insurance is building's insurance (against fire, flood, etc). It cannot be charged to the tenant via NK and is fully up to owner to pay. So this will be a new item in your NK after the buy. There are some other insurances that are worth having, especially building's liability insurance (e.g. imagine a tile falling from your roof and killing a pedestrian...), and their costs too cannot be passed onto tenant's NK and must be paid by the owner.

For a renter, there are no mandatory insurances. Personal liability insurance is worth having in general, usually It's not limited just to tenant's damages, but covers many other life situations.

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-Maintenance is something I haven't factored in. Is it safe to assume 0.5%/year?
For current maintenance excluding major renovations, yes, that should be enough. Renovations will cost more - swiss labour is very expensive. Old unrenovated buildings need a significant investment to bring them into a good state and this needs to be considered when buying.

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The owner must have buildings insurance, not a renters expense.
Banks assume 1% annual maintenance, with a flat or older house it can be way more.
Banks assume 1% for NK + maintenance.

Quote:
-another sunk cost I forgot to mention is the purchasing cost (notary fees, real estate agent etc), which can add up significantly.
This varies a lot in different canton. In ZH, the costs are really minimal, 0.1-0.2%. That's less than a month's rent.

Agents are very expensive and greedy indeed, I think a typical cut is 2-3%. But nobody is really forced to use them. If your seller has an agent, it's customary for the seller to pay his commission (out of sale price of course), don't agree to pay any part of it yourself.
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  #46  
Old 06.02.2017, 11:50
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Re: Mortgage in Switzerland

Also worth thinking about with a mortgage is that banks want to see, in simple terms, that you can afford to pay the mortgage should interest rates rise in the future.

A typical test is... if interest rates go to 5%, would your mortgage be less than a third of your income. If so, thats fine. If not, a bank would likely say that for them to give you a mortgage is too risky.
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  #47  
Old 06.02.2017, 13:17
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Re: Mortgage in Switzerland

I think in a following way.

Option A. You have 350K + you rent what you can afford

Option B. You don't have 350K, don't own a flat and have 650K of debt, which you'll be paying forever.

I see it mostly negative to get mortgage. Am I missing something?
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  #48  
Old 06.02.2017, 13:22
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Re: Mortgage in Switzerland

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I see it mostly negative to get mortgage. Am I missing something
Yes

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Option A. You have 350K + you rent what you can afford
Paying ridiculously high rents which historically have been only increasing in good times and bad.

Quote:
Option B. You don't have 350K, don't own a flat and have 650K of debt, which you'll be paying forever.
You do own the flat, which is an appreciating asset and brings you income in the form of rent savings. And you get to borrow 650K at ridicoulously cheap rates. And rescue your money from the banksters from pillar 2 and 3 schemes.
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  #49  
Old 06.02.2017, 13:27
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Re: Mortgage in Switzerland

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I think in a following way.

Option A. You have 350K + you rent what you can afford

Option B. You don't have 350K, don't own a flat and have 650K of debt, which you'll be paying forever.

I see it mostly negative to get mortgage. Am I missing something?
If this is your understanding of the financial modelling around buying a house then I really really really advise you not to buy and continue renting.
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  #50  
Old 06.02.2017, 13:53
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Re: Mortgage in Switzerland

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I think in a following way.

Option A. You have 350K + you rent what you can afford

Option B. You don't have 350K, don't own a flat and have 650K of debt, which you'll be paying forever.

I see it mostly negative to get mortgage. Am I missing something?
Yes, the 1m house will have a tax value of about 1/3 that, so 333k. With a 650k mortgage, for tax reasons you are now at -317k (333k assets -650k debt), which is nice when figuring your global wealth!

Tom
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  #51  
Old 06.02.2017, 14:10
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Re: Mortgage in Switzerland

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Yes


Paying ridiculously high rents which historically have been only increasing in good times and bad.
Thats not true for existing tenants. Between 1999 - 2014 my rent went up by less than 10%, I could have applied for a rent reduction as the base interest rate in my contract was 3.5%.
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Old 06.02.2017, 14:16
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Re: Mortgage in Switzerland

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Thats not true for existing tenants. Between 1999 - 2014 my rent went up by less than 10%, I could have applied for a rent reduction as the base interest rate in my contract was 3.5%.
Yes, increasing rent during the contract isn't easy for the landlords. But there's a risk that you can get kicked out, say because management wants to renovate to jack up the prices, and then you'd be forced to rent something else, likely at much higher current market rates.
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Old 06.02.2017, 14:22
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Re: Mortgage in Switzerland

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Yes, increasing rent during the contract isn't easy for the landlords. But there's a risk that you can get kicked out, say because management wants to renovate to jack up the prices, and then you'd be forced to rent something else, likely at much higher current market rates.
Normally they offer to existing tenants as they could appeal any termination. The law sides with the tenants. I know plenty of people who have rented the same place for 20 to 30 years that have been renovated whilst living there.
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  #54  
Old 06.02.2017, 16:37
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Re: Mortgage in Switzerland

Does anything equivalent of 'Equity Loan Scheme', that of UK, exist in Switzerland?

Scheme where Govt. borrows you 20% of purchase price interest free for 5 years?

refering to https://www.moneyadviceservice.org.u...ousing-schemes
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Old 06.02.2017, 17:28
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Re: Mortgage in Switzerland

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Does anything equivalent of 'Equity Loan Scheme', that of UK, exist in Switzerland?

Scheme where Govt. borrows you 20% of purchase price interest free for 5 years?
No.

In fact the trend here in recent years was to tighten the rules further to avoid another crash.

If 20% is too much for you, considering joining some Baugenossenschaft (if you can even find one with a vacancy), I believe they typically only want 5-6% cash. The trade-off is that the ownership is less direct and usually not for profit
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Old 06.02.2017, 20:06
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Re: Mortgage in Switzerland

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If this is your understanding of the financial modelling around buying a house then I really really really advise you not to buy and continue renting.
Really really really useful post and advise! Thanks
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  #57  
Old 06.02.2017, 20:09
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Re: Mortgage in Switzerland

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You do own the flat, which is an appreciating asset and brings you income in the form of rent savings. And you get to borrow 650K at ridicoulously cheap rates. And rescue your money from the banksters from pillar 2 and 3 schemes.
Thanks Ivan,

the issue is this "appreciating asset" is likely to depreciate in the upcoming years if bought now. That is one of my concerns, another one is degree of flexibility of having 350K cash/investment or 650K debt.
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Old 06.02.2017, 20:53
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Re: Mortgage in Switzerland

It's a risk, yes. But no risk, no gain.
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Old 06.02.2017, 21:04
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Re: Mortgage in Switzerland

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Thanks Ivan,

the issue is this "appreciating asset" is likely to depreciate in the upcoming years if bought now. That is one of my concerns, another one is degree of flexibility of having 350K cash/investment or 650K debt.
Why ? House prices may go up 50% in the next 15 years. If you sure it's going to depreciate you already have your answer to your investment question. Also if you invest 350k now in the stock market, it could well be on the edge of a crash in which case a house could be a better investment.
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Old 06.02.2017, 21:23
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Re: Mortgage in Switzerland

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Why ? House prices may go up 50% in the next 15 years. If you sure it's going to depreciate you already have your answer to your investment question. Also if you invest 350k now in the stock market, it could well be on the edge of a crash in which case a house could be a better investment.
Housing is a leveraged investment. If you put down 20%, and the value decreases 10% then you have lost half.

The stock market is (for most of us) not a leveraged investment. So a 10% decrease, is only a 10% loss.

Housing is very illiquid, and has very high transaction costs, whereas equities are very liquid and easy to sell quickly. And historically, the stock market has FAR outperformed residential housing as an asset class.

My point is simply that one's focus in buying a house should be less about investment, and more about the lifestyle you intend to have over the next 10 years as you live there.
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