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Old 27.01.2021, 12:22
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Mortgage basics for newbie

Hello Everyone,

From my post yesterday some of you may have figured I am a future newbie in Switzerland and trying to get my head wrapped around a few things as mortgages work quite differently in my home country. I have a few unclear thoughts, questions on mortgages, any help on these thoughts would be appreciated. Please don’t roast me 😊

Do I understand correctly, that in Switzerland mortgages do not get repaid but get paid up to 1/3 or 35% of the property value? And out of the 3 components whose sum your salary must exceed at least 3 times, “living costs” is not actually paid to the bank, amortization is paid until you reach the aforementioned limit and interest is paid as a sort of “rent”, but doesn’t actually increase your “ownership ratio/share” in the property?

Another question is what happens at the end of the mortgage? Assume there is no more amortization left and I have paid 35%. I guess I have 3 options: pay out the rest 65%, apply for another mortgage or sell, is that right? And if I sell, how does that work, say the original value was x and now it could be sold for y, do I “get” 35% of x+(y-x) i.e. also any profit/loss or do I get 35%y, i.e. we “share” any profit/loss with the bank or do I get 35%x, i.e. the bank gets the full profit/loss. Or does it depend on the contract? Although I guess one of the 3 is the most common…

Also, I am a bit confused by the most important things you need to consider when selecting the length of the mortgage? Does a longer mortgage have a higher interest rate because that secures that rate (although slightly higher) and the property for a longer period or why is that?

What is also unclear to me, how moving your mortgage to a new property works, can someone give me a simple example of this? I assume that is based on selling the previous one.

Sorry for the potentially very basic questions, I am not a finance expert (especially not regarding Swiss mortgages as you can tell) but thank you for your help in advance.
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Old 27.01.2021, 12:47
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Re: Mortgage basics for newbie

I don’t understand mortgages at all, but we have 3 different mortgages (with same bank) on our apartment. I think one is 10 years and the other 2 are 5 years (or the other way). Once they run out, we just renew them (we won’t be paying off in 5 years )
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Old 27.01.2021, 12:56
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Re: Mortgage basics for newbie

Post Finance provides a reasonable summary:

https://www.postfinance.ch/en/privat...formation.html

You should also consider the rules for a third country national buying property.
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Old 27.01.2021, 13:32
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Re: Mortgage basics for newbie

The mortgage is just a loan - its only relation to the property is the fact that it is secured on that property (actually that's what a "mortgage" is - the rights to the property, the term is misused for "mortgage backed loans").

So when you sell the property, you have to pay back the mortgage or transfer it to another property, any gains or losses are yours in full.

Most (?) people in CH continue to take out mortgages until they die, at which point their children inherit the whole lot and decide what to do with it.

With interest rates as low as they are, and with the benefits for wealth tax, it doesn't make much sense to pay off the last 60% of the mortgage. You're generally better off investing or just enjoying that money.
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Old 27.01.2021, 13:53
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Re: Mortgage basics for newbie

It should be noted that upon retirement, your income usually decreases - sometimes sharply.

As such 1/3 of "a lot less than it used to be" can be dangerously close or sometimes below the threshold for affordability - especially as properties get older and require more maintenance.

So, the bank might tell you that they cannot renew the mortgage and you have to sell - especially if your 2nd and 3rd pillar aren't really worth very much.

You should as such make a plan how to be able to pay down a large amount of the mortgage on retirement - whether you actually do pay it down is another thing, but just so that you don't put yourself in that situation where you have no choice but to sell.
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Old 27.01.2021, 14:48
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Re: Mortgage basics for newbie

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The mortgage is just a loan - its only relation to the property is the fact that it is secured on that property (actually that's what a "mortgage" is - the rights to the property, the term is misused for "mortgage backed loans").

So when you sell the property, you have to pay back the mortgage or transfer it to another property, any gains or losses are yours in full.

Most (?) people in CH continue to take out mortgages until they die, at which point their children inherit the whole lot and decide what to do with it.

With interest rates as low as they are, and with the benefits for wealth tax, it doesn't make much sense to pay off the last 60% of the mortgage. You're generally better off investing or just enjoying that money.
Thank you for clarifying, especially what happens when selling. Do you have any advice about what to take into consideration when choosing the length of the mortgage? I know people also tend to have more mortgages, but is it just to secure that rate for a certain period (in case of a fixed-rate mortgage)?

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It should be noted that upon retirement, your income usually decreases - sometimes sharply.

As such 1/3 of "a lot less than it used to be" can be dangerously close or sometimes below the threshold for affordability - especially as properties get older and require more maintenance.

So, the bank might tell you that they cannot renew the mortgage and you have to sell - especially if your 2nd and 3rd pillar aren't really worth very much.

You should as such make a plan how to be able to pay down a large amount of the mortgage on retirement - whether you actually do pay it down is another thing, but just so that you don't put yourself in that situation where you have no choice but to sell.
I have read about this but thank you for reminding me.
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Old 27.01.2021, 14:50
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Re: Mortgage basics for newbie

After reading that PostFinance link, then the UBS website... I'm totally confused about Amortisation ... my mortgage repayments fit neither (and I'm with UBS)
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Old 27.01.2021, 15:30
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Re: Mortgage basics for newbie

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Thank you for clarifying, especially what happens when selling. Do you have any advice about what to take into consideration when choosing the length of the mortgage? I know people also tend to have more mortgages, but is it just to secure that rate for a certain period (in case of a fixed-rate mortgage)?
Everyone has an individual view and time horizon. Generally speaking people want to minimise the cost while maintaining some flexibility and having some certainty for their cash flow, so will have several tranches (one poster mentioned having 3). When we took ours out, we took a 10y tranche a 6y tranche and a floating tranche. The floating we have since converted to a fix that expires at the same time as the 6y. Hindsight is 20:20, but we would have been better to date with 100% floating, but with a blended rate of 1% or so, it‘s hard to be too bitter.

Note that the fix is a binding commitment from both sides. If you want to get out early, the bank will expect you to pay the interest for the remainder of the term.
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Old 27.01.2021, 15:45
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Re: Mortgage basics for newbie

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With interest rates as low as they are, and with the benefits for wealth tax, it doesn't make much sense to pay off the last 60% of the mortgage. You're generally better off investing or just enjoying that money.
There is no "benefit" in respect to wealth tax. Considering you have the money to pay back the mortgage your taxable net wealth is the same, regardless if you pay it back or not.

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After reading that PostFinance link, then the UBS website... I'm totally confused about Amortisation ... my mortgage repayments fit neither (and I'm with UBS)
Check your mortgage contract(s).
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Old 27.01.2021, 15:53
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Re: Mortgage basics for newbie

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There is no "benefit" in respect to wealth tax. Considering you have the money to pay back the mortgage your taxable net wealth is the same, regardless if you pay it back or not.
Not if you put it in your pension.

Also not if you spend it
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Old 27.01.2021, 15:54
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Re: Mortgage basics for newbie

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Do you have any advice about what to take into consideration when choosing the length of the mortgage? I know people also tend to have more mortgages, but is it just to secure that rate for a certain period (in case of a fixed-rate mortgage)?
It gives a peace of mind and financial security. It is a gamble/bet on the future interest rate. I f you think it will remain or get even lower you should take out a short term mortgage. If you think the interest rate will go up you should take out a long term mortgage.

If the interest rate is 1% it might go down to 0% (in some rare case may be even bellow). On the other hand it can go up to 6% (like in the early 1990' ), or 15%, or even more.
For historic interest rates see: https://www.snb.ch/de/mmr/reference/...en_book.de.pdf
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Old 27.01.2021, 16:00
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Re: Mortgage basics for newbie

On the length of fix question, I suggest considering the likely timeline for any personal changes and also your risk appetite.

Events like kids arriving or leaving can have an impact on your finances and likelihood of moving, so it makes sense to consider these when planning your finance over a long-term period.
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Old 27.01.2021, 16:29
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Re: Mortgage basics for newbie

I was told that if you have multiple tranches of mortgage (e.g. one at 10 years, 1 and 5 years and 1 at 3 years) they would all need to be with the same provider (bank/insurance), and when it comes to renewing you would not be able to shop around, but would rather be obligated to stay with the same bank/insurance company, even if they now have less favourable rates than other institutions.

Has anyone come across that? Thanks.
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Old 27.01.2021, 17:00
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Re: Mortgage basics for newbie

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I was told that if you have multiple tranches of mortgage (e.g. one at 10 years, 1 and 5 years and 1 at 3 years) they would all need to be with the same provider (bank/insurance), and when it comes to renewing you would not be able to shop around, but would rather be obligated to stay with the same bank/insurance company, even if they now have less favourable rates than other institutions.

Has anyone come across that? Thanks.
Yes, it‘s true. You have to decide on the balance. I plan when our earlier tranches expire that we will renew to align them with the longer term one and then make a decision on whether we want to stay with the same bank and whether we want to repay, have a single tranche or multiple tranches.
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Old 27.01.2021, 17:29
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Re: Mortgage basics for newbie

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I was told that if you have multiple tranches of mortgage (e.g. one at 10 years, 1 and 5 years and 1 at 3 years) they would all need to be with the same provider (bank/insurance), and when it comes to renewing you would not be able to shop around, but would rather be obligated to stay with the same bank/insurance company, even if they now have less favourable rates than other institutions.

Has anyone come across that? Thanks.
A lender won't accept the property as collateral if another lender already has rights against it, in the case of a default they don't want to have problems with priority of rights and so on.
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Old 27.01.2021, 17:50
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Re: Mortgage basics for newbie

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With interest rates as low as they are, and with the benefits for wealth tax, it doesn't make much sense to pay off the last 60% of the mortgage. You're generally better off investing or just enjoying that money.
Wealth tax is so low that the benefits are negligible. The benefits are on income tax given you deduct the interests you pay and therefore lower your overall taxable income and tax rate.

OP - there is another thread where some of us where discussing that the idea of not amortizing the property because of tax must be looked individually as it may or not be the case depending on own situation. The banks of course have an interest in you paying them interests forever so will not necessarily help you to see this option.

https://www.englishforum.ch/housing-...ml#post3268201
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Old 27.01.2021, 17:51
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Re: Mortgage basics for newbie

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Everyone has an individual view and time horizon. Generally speaking people want to minimise the cost while maintaining some flexibility and having some certainty for their cash flow, so will have several tranches (one poster mentioned having 3). When we took ours out, we took a 10y tranche a 6y tranche and a floating tranche. The floating we have since converted to a fix that expires at the same time as the 6y. Hindsight is 20:20, but we would have been better to date with 100% floating, but with a blended rate of 1% or so, it‘s hard to be too bitter.

Note that the fix is a binding commitment from both sides. If you want to get out early, the bank will expect you to pay the interest for the remainder of the term.
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It gives a peace of mind and financial security. It is a gamble/bet on the future interest rate. I f you think it will remain or get even lower you should take out a short term mortgage. If you think the interest rate will go up you should take out a long term mortgage.

If the interest rate is 1% it might go down to 0% (in some rare case may be even bellow). On the other hand it can go up to 6% (like in the early 1990' ), or 15%, or even more.
For historic interest rates see: https://www.snb.ch/de/mmr/reference/...en_book.de.pdf
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On the length of fix question, I suggest considering the likely timeline for any personal changes and also your risk appetite.

Events like kids arriving or leaving can have an impact on your finances and likelihood of moving, so it makes sense to consider these when planning your finance over a long-term period.
Thank you all for your answers, this clarifies the question for me.
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Old 27.01.2021, 18:19
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Re: Mortgage basics for newbie

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Wealth tax is so low that the benefits are negligible. The benefits are on income tax given you deduct the interests you pay and therefore lower your overall taxable income and tax rate.

OP - there is another thread where some of us where discussing that the idea of not amortizing the property because of tax must be looked individually as it may or not be the case depending on own situation. The banks of course have an interest in you paying them interests forever so will not necessarily help you to see this option.

https://www.englishforum.ch/housing-...ml#post3268201
People keep saying that wealth tax is low so the benefit is negligible, but since the wealth in your property is generally high it is maybe not so.

For example, in SG I would pay about 3250 per year on 1 million wealth. 0.325% is not a lot, but compared to current low interest rates, pension returns and stagnant property prices it is not trivial either.
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Old 27.01.2021, 19:04
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Re: Mortgage basics for newbie

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People keep saying that wealth tax is low so the benefit is negligible, but since the wealth in your property is generally high it is maybe not so.

For example, in SG I would pay about 3250 per year on 1 million wealth. 0.325% is not a lot, but compared to current low interest rates, pension returns and stagnant property prices it is not trivial either.
Are you sure? This link says that you would pay 1700pa
https://www.estv.admin.ch/dam/estv/d..._de.pdf#page16

Also note that you have a per person deduction of CHF 75,000 and that the taxable value of your property is generally far lower than the market value. Ticino Tom says his is several times less. Mine is about half. I‘m not going to go through the SG tax code, but certainly in ZH and SZ you can deduct 0.3% of your financial assets‘ value for wealth management fees too.
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Old 27.01.2021, 19:21
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Re: Mortgage basics for newbie

I'm guessing the OP is a Brit.. my advice.. forget totally about UK mortgages. As stated, a Swiss mortgage is just renting from the bank. Disadvantages are homeownership costs, a potential rise in rates (unlikely), lock in if you go for fixed terms and, of course, putting in around 25% of the sale price with your own cash. Advantages, you should be paying less for more per month compared to rents for the property, you can decorate as you like and, fingers crossed, the value of the property goes up.
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