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Old 08.08.2012, 22:48
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Mortgage in Switzerland

I'm completely unfamiliar with mortgages in Switzerland... Coming from Central Europe I was used to this simple model:
Let's say you are going to buy an apartment which costs 100.000 Euro and you have 20.000 in cash. The bank lends you the rest (80.000) after you made an agreement about the interest rate and for how many years the rate is fixed.

If you plan to pay off your loan in 20 - 30 years, it can happen that the amount you are going to pay the bank in those years is 1.5 times the original loan (120.000 in this case). So, let's say I want to pay it off in 20 years...
120.000 / (20 years * 12 months) = 500 Euro is the amount I will be paying each month.

I used the mortgage calculators of UBS and Credit Suisse and other banks in Switzerland, however it only tells me how much I will be paying a month and not how many years will it take me to pay the loan off completely.

I read on this forum that the mortgage is somehow divided into 2 or 3 parts and that you will never pay the whole loan off since you are expected to pay the interest every single month until you die... Maybe I just misunderstood it but that would explain why the mortgage calculators of banks didn't let me set the number of years during which I will be paying off the loan.

So, is it possible in Switzerland to pay the whole mortgage off in 10 or 15 years or not?

Quote:
Maybe you refer to the 1st and 2nd rank in a mortgage.
The mortgage of a house is split in 3 parts:
- 20% of the value that you bring in cash or pension fund (2nd/3rd pillar)
- 65% covered by a 1st rank mortgage
- 15% covered by a 2nd rank mortgage

The idea as explained in the previous post of AbFab is that you'll pay interest on your loan. The mortgage interests are negociated on a 5, 7, 10years term. The bank expects that you pay off 100% of your 2nd rank mortgage when you retire, and the remaining 65% will remain through an interest you pay on the loan. Very important is to have 1st and 2nd rank mortgage on synchronized terms (i.e both 5 or 7 or 10) so that you have full flexibility to renegociate the conditions with any bank.
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Old 08.08.2012, 22:56
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Re: Mortgage in Switzerland

Mostly in Switzerland you are expected to pay of 20% of the capital initially, and borrow the remaining 80%. Of this 65% is not expected to be repaid. The missing 15% is expected to be repaid at 1% each year. However, the mortgage itself is usually relatively short (compared to US where 30 year mortgages were/are common). So, say you take a 5 year fixed rate mortgage. After 5 years you will have paid 5x1% of the capital and you will have paid interest on 80%, 79%, 78%, 77%, 76% over that period. At the end of 5 years you still owe 75%. Now you need to renegotiate a mortgage for that 75%. Or, if you have spare cash you could pay off e.g. 5% lump sum and negotiate a new mortgage for the 70%. Or if you won the lottery, just pay off the 75% in full...however your finances are set at the time. Once you reach 65% mortgage, you are no longer expect to pay off any further capital, although of course at each renewal, you can choose the amount you need to renew. All the above is I believe the typical deal, but you of course will be able to find exceptions.
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Old 08.08.2012, 23:15
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Re: Mortgage in Switzerland

Of course it's possible to pay off the loan. (Some people do, many don't - an individual choice. But if rates rise as expected, I'd guess that more people will start paying off their mortgages.)

What you need to understand, though, is that you will pay the interest for whatever period you contract.

If you take out a 10 year fixed rate loan, you will pay 10 years' worth of interest, even if you repay the loan early.

You set up the mortgage that fits your needs, your goals, your financial expectations, your view of what will happen in the market.

A common way to structure a mortage is in tranches, coming due at varying times. For instance, one tranche at the 3 month Libor rate, one at say 1 or 2 years fixed, one at 5 years fixed. Or whatever. When a tranche comes due, you can either pay it off, or renew at the new market rate.

Also be aware that while a 20% deposit is common, if you put down 34% or more you will not need the second mortgage - and likely get a better rate.

You should sit down with your banker to work out what makes the most sense for you.
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Old 08.08.2012, 23:19
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Re: Mortgage in Switzerland

AH! Your problem is that your missing the fact that mortgages here are based on the idea of a perpetuity. So they assume a 1000 years to repay.

You still have to amortize your home. The duration of the loan is 3 months to 10 years, but that thats only the duration of the interest rate, not the period you need to pay the loan back by.

So the amounts you have to pay for the mortgage are much lower.

Is that clear?
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Old 08.08.2012, 23:23
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Re: Mortgage in Switzerland

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I'm completely unfamiliar with mortgages in Switzerland... Coming from Central Europe I was used to this simple model:
Let's say you are going to buy an apartment which costs 100.000 Euro and you have 20.000 in cash. The bank lends you the rest (80.000) after you made an agreement about the interest rate and for how many years the rate is fixed.

If you plan to pay off your loan in 20 - 30 years, it can happen that the amount you are going to pay the bank in those years is 1.5 times the original loan (120.000 in this case). So, let's say I want to pay it off in 20 years...
120.000 / (20 years * 12 months) = 500 Euro is the amount I will be paying each month.

I used the mortgage calculators of UBS and Credit Suisse and other banks in Switzerland, however it only tells me how much I will be paying a month and not how many years will it take me to pay the loan off completely.

I read on this forum that the mortgage is somehow divided into 2 or 3 parts and that you will never pay the whole loan off since you are expected to pay the interest every single month until you die... Maybe I just misunderstood it but that would explain why the mortgage calculators of banks didn't let me set the number of years during which I will be paying off the loan.

So, is it possible in Switzerland to pay the whole mortgage off in 10 or 15 years or not?
yes, you can if you want to. you can even buy for cash and not get a mortgage at all.

it seems common here to leave some amount outstanding. maybe with the low rates, you might have a better alternative investment than paying down the mortgage...
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Old 09.08.2012, 00:05
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Re: Mortgage in Switzerland

One of the reasons that many people never pay off their mortgage is the tax deduction, which can be significant. Again, this is something you need to look at given your individual circumstances.

For instance, burdened as I am with the blue passport, and living in Steuerparadis SZ, I have no real incentive to reduce my Swiss taxes further - those Rappen saved go straight into Uncle Sam's pocket, not mine. So the tax deduction for mortgage interest paid doesn't help me all that much. Depending on current rates, it might be advantageous to pay off the loan and save myself a decade or so of interest payments.

But if I didn't have that blue passport... as you can see, YMMV.
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Old 09.08.2012, 06:18
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Re: Mortgage in Switzerland

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One of the reasons that many people never pay off their mortgage is the tax deduction, which can be significant. Again, this is something you need to look at given your individual circumstances.

For instance, burdened as I am with the blue passport, and living in Steuerparadis SZ, I have no real incentive to reduce my Swiss taxes further - those Rappen saved go straight into Uncle Sam's pocket, not mine. So the tax deduction for mortgage interest paid doesn't help me all that much. Depending on current rates, it might be advantageous to pay off the loan and save myself a decade or so of interest payments.

But if I didn't have that blue passport... as you can see, YMMV.
Can't you deduct the mortgage interest from your US taxes as well?
I understand that the mortgage interest reduces one's Swiss taxes but I thought that this was also one of the few deductions allowed to US expats?
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Old 09.08.2012, 07:58
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Re: Mortgage in Switzerland

Your tax declaration has 2 main chapters; revenue and fortune. The estimated value of your house is part of your fortune. Your loan is considered a debt, a negative part of your fortune. The difference between both values is taken in consideration for your tax payment.
If you don't amortize your home, you'll pay interest to the bank.
If you amortize your home, your fortune increases and you will pay more taxes but less interest to the bank.
The question is about the difference between the interest rate to the bank and the tax rate on a certain fortune, which is different per canton.
You can also consider it to be a moral point; do I want to pay interest to a bank or taxes to a community...
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Old 09.08.2012, 08:03
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Re: Mortgage in Switzerland

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yes, you can if you want to. you can even buy for cash and not get a mortgage at all.

it seems common here to leave some amount outstanding. maybe with the low rates, you might have a better alternative investment than paying down the mortgage...
Paying cash didn't make sense for us when leaving money in the bank earned more in interest than we were paying on the mortgage. One term deposit, locked in almost a year ago, currently earns over 3 times our mortgage rate
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Old 09.08.2012, 09:05
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Re: Mortgage in Switzerland

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One term deposit, locked in almost a year ago, currently earns over 3 times our mortgage rate
Which bank was that?
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Old 09.08.2012, 09:08
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Re: Mortgage in Switzerland

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Can't you deduct the mortgage interest from your US taxes as well?
I understand that the mortgage interest reduces one's Swiss taxes but I thought that this was also one of the few deductions allowed to US expats?
I'd also like to know the answer to this question It would only be fair if you could. Otherwise expats who rent and can take a foreign housing allowance have a significant advantage over owners. It would also be a form of discrimination to allow us based citizen the deduction but not foreign based citizens
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Old 09.08.2012, 09:21
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Re: Mortgage in Switzerland

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Paying cash didn't make sense for us when leaving money in the bank earned more in interest than we were paying on the mortgage. One term deposit, locked in almost a year ago, currently earns over 3 times our mortgage rate
Are you talking about a CHF deposit?
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Old 09.08.2012, 10:14
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Re: Mortgage in Switzerland

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Can't you deduct the mortgage interest from your US taxes as well?
I understand that the mortgage interest reduces one's Swiss taxes but I thought that this was also one of the few deductions allowed to US expats?
Yes you can.

However, depending on your individual situation (foreign tax credits, etc.) it may or may not make much of a difference. And as pagl57 points out - you will be paying both governments - where do you want to see your tax money go?

There are so many factors that will vary - you need to sit down with both a tax pro and your mortgage lender to determine what is the best approach for your own situation. And your strategy needs to be reassessed periodically and fine-tuned as your financial situation and goals change.
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Old 09.08.2012, 10:21
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Re: Mortgage in Switzerland

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I'd also like to know the answer to this question It would only be fair if you could. Otherwise expats who rent and can take a foreign housing allowance have a significant advantage over owners. It would also be a form of discrimination to allow us based citizen the deduction but not foreign based citizens
No idea. But on a broad principle, if you can be taxed twice, then you can deduct everything twice...
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Old 09.08.2012, 10:59
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Re: Mortgage in Switzerland

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Your tax declaration has 2 main chapters; revenue and fortune. The estimated value of your house is part of your fortune. Your loan is considered a debt, a negative part of your fortune. The difference between both values is taken in consideration for your tax payment.
If you don't amortize your home, you'll pay interest to the bank.
If you amortize your home, your fortune increases and you will pay more taxes but less interest to the bank.
The question is about the difference between the interest rate to the bank and the tax rate on a certain fortune, which is different per canton.
You can also consider it to be a moral point; do I want to pay interest to a bank or taxes to a community...
How does the whole concept of Eigenmietwert play into this equation. I assume it comes under "revenue"

So (using round numbers) if you have an Eigenmietwert of 12000 per year and accrued home principal of 5000, but paid 9000 in interest

Then your additional taxable income is 12,000-9,000=3,000 CHF. (Tax Rate A)

Your additional wealth is 5000 CHF ( tax rate B...however much lower than A)

Is this a correct way to look at it?
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Old 09.08.2012, 11:33
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Re: Mortgage in Switzerland

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How does the whole concept of Eigenmietwert play into this equation. I assume it comes under "revenue"

So (using round numbers) if you have an Eigenmietwert of 12000 per year and accrued home principal of 5000, but paid 9000 in interest

Then your additional taxable income is 12,000-9,000=3,000 CHF. (Tax Rate A)

Your additional wealth is 5000 CHF ( tax rate B...however much lower than A)

Is this a correct way to look at it?
Eigenmietwert is added to your income. There is provision for this on page 2 of the tax return (Canton Zurich). The rate is advised by your local council and certain maintenance and repair costs are deductible. I always take the Pauchal (standard package no questions asked) deduction of about CHF 4000 off this.

Interest is deducted on page 3 with a sub sheet to complete. Wealth is page 4 with the mortgage deducted and a conservative value of the property shown. Again this will be on the sheet supplied by the local council with the Eigenmietwert valuation...
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Old 09.08.2012, 22:29
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Re: Mortgage in Switzerland

OK, now I understand a little bit more but still not everything...

The example is still the same... I have 100.000 francs in cash, the price of the apartment is 500.000, so my mortgage is 400.000.

I pay in cash upfront 100.000.
Then I'm supposed to pay 15% (75.000) in 10 years (2nd rank mortgage)....

After doing it, I still have a debt of 65% (325.000).
I understand that since the interest rates are low, around 1 - 2 %, it is better to invest my money and get a profit of 5, 10, maybe even 15 % a year and not trying to pay off the mortgage as soon as possible.

But, what will happen with those 65%? I will be paying a little amount each month until I die, so maybe after I die I will still have a debt of 30 or 40%.

Now, the bank sells my apartment for the best price possible (let's say 400.000 francs), get those 30 or 40% (150.000 - 200.000) and my children will inherit the rest (200.000 - 250.000)?

Are people who are retired able to pay the mortgage?
Does the bank push them to pay some minimum amount a month or it's up to them how much they pay? If it's true, then at the moment of their death they can still owe to the bank 50 or 60%...

What is the motivation of the banks to give people a never-ending mortgage in the first place?
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Old 09.08.2012, 22:37
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Re: Mortgage in Switzerland

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OK, now I understand a little bit more but still not everything...

The example is still the same... I have 100.000 francs in cash, the price of the apartment is 500.000, so my mortgage is 400.000.

I pay in cash upfront 100.000.
Then I'm supposed to pay 15% (75.000) in 10 years (2nd rank mortgage)....

After doing it, I still have a debt of 65% (325.000).
I understand that since the interest rates are low, around 1 - 2 %, it is better to invest my money and get a profit of 5, 10, maybe even 15 % a year and not trying to pay off the mortgage as soon as possible.

But, what will happen with those 65%? I will be paying a little amount each month until I die, so maybe after I die I will still have a debt of 30 or 40%.

Now, the bank sells my apartment for the best price possible (let's say 400.000 francs), get those 30 or 40% (150.000 - 200.000) and my children will inherit the rest (200.000 - 250.000)?

Are people who are retired able to pay the mortgage?
Does the bank push them to pay some minimum amount a month or it's up to them how much they pay? If it's true, then at the moment of their death they can still owe to the bank 50 or 60%...

What is the motivation of the banks to give people a never-ending mortgage in the first place?
My understanding the 65% is a tax thing desired by most people. You can certainly pay off the mortgage if you want. If you keep a 65% mortgage you would pay interest for life on the 65%. The banks will give you what you want.
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Old 09.08.2012, 22:38
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Re: Mortgage in Switzerland

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Now, the bank sells my apartment for the best price possible (let's say 400.000 francs), get those 30 or 40% (150.000 - 200.000) and my children will inherit the rest (200.000 - 250.000)?
No, your children inherit the house, and it's up to them to pay off the bank (doing that with my wife's parent's estate as we speak), and divy up the rest.

Tom

Last edited by st2lemans; 10.08.2012 at 08:38.
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Old 09.08.2012, 22:50
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Re: Mortgage in Switzerland

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OK, now I understand a little bit more but still not everything...

The example is still the same... I have 100.000 francs in cash, the price of the apartment is 500.000, so my mortgage is 400.000.

I pay in cash upfront 100.000.
Then I'm supposed to pay 15% (75.000) in 10 years (2nd rank mortgage)....

After doing it, I still have a debt of 65% (325.000).
I understand that since the interest rates are low, around 1 - 2 %, it is better to invest my money and get a profit of 5, 10, maybe even 15 % a year and not trying to pay off the mortgage as soon as possible.

But, what will happen with those 65%? I will be paying a little amount each month until I die, so maybe after I die I will still have a debt of 30 or 40%.

Now, the bank sells my apartment for the best price possible (let's say 400.000 francs), get those 30 or 40% (150.000 - 200.000) and my children will inherit the rest (200.000 - 250.000)?

Are people who are retired able to pay the mortgage?
Does the bank push them to pay some minimum amount a month or it's up to them how much they pay? If it's true, then at the moment of their death they can still owe to the bank 50 or 60%...
If you are used to system where people pay off the mortgage at 65 years and retire without payment burden, then the Swiss system can seem an odd one.

But 60% of people here live in rented accommodation and will pay rent until the day they die. So a mortgage is no different.

What your figures fail to show is an increase in value of the property. And though current markets may differ. The last 50 years has shown a steady increase in value of property, making of course the % that is the mortgage smaller over time.

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What is the motivation of the banks to give people a never-ending mortgage in the first place?
I asked my bank manager the same question. He reckoned that it was the safest investment a bank could make with a guaranteed income and little risk. That was some years ago mind...
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