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  #41  
Old 31.07.2007, 15:33
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Re: Property mortgages

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AbFab, personally a very informative post, so thanks. On the above calculation, is that based on standard terms ? i.e. 20% downpayment ?

thx P
It based on paying the interest on what you borrow using the figures from my ZKB mortgage. No deposits/downpayments in the calulations...
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  #42  
Old 31.07.2007, 15:37
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Re: Property mortgages

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From what I have gathered, you are only obliged to pay of 1% per year. After that you CAN pay more. But most professionals* I have talked to so far say that it is more financially beneficial to pay only the minimum, as others here have said. Also, it was recommended that we pay up 40% then they pay interest only.

It's a system that doesn't compute in my limited math capacity brain... But that's what we have been recommended. Now if I could only find a house!

(Our offer on a farm house was rejected today... We now need to decide if we want to offer more or not....)

*Financial adviser & mortgage broker
I also agree it is better to pay the minimum so I paid 0% down and pay 0% off per year. My mortgage rate is 3.375%...
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  #43  
Old 31.07.2007, 15:52
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Re: Property mortgages

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It's a system that doesn't compute in my limited math capacity brain... But that's what we have been recommended. Now if I could only find a house!

(Our offer on a farm house was rejected today... We now need to decide if we want to offer more or not....)
The answer will depend on several variables, several of which if I knew the answer to with certainty I wouldnt be sitting here doing this ;-)

- what interest rate you will pay in the future
- what the notional rental value of the property is (there is a complex formula for this but in normally works out in the region of 60% of the real market rent or 3% of the property value)
- what your marginal tax rate is
- what return you expect to be able to get on the money invested rather than used to repay the mortgage (and whether that is capital gain or income)

The last point is effectively how risk averse are you: by borrowing lots and saving you are leveraging up, it's ultimately more risky.

Really I think it boils down to personal choice. Are you more comfortable having repaid it asap, or do you like to have more risk, in which case do you have the discipline to make sure you can eventually repay it. Note that in Switzerland you could just leave a big mess for your kids (since debts are also inherited).

Daniel
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  #44  
Old 31.07.2007, 16:01
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Re: Property mortgages

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The answer will depend on several variables, several of which if I knew the answer to with certainty I wouldnt be sitting here doing this ;-)

- what interest rate you will pay in the future
- what the notional rental value of the property is (there is a complex formula for this but in normally works out in the region of 60% of the real market rent or 3% of the property value)
- what your marginal tax rate is
- what return you expect to be able to get on the money invested rather than used to repay the mortgage (and whether that is capital gain or income)

The last point is effectively how risk averse are you: by borrowing lots and saving you are leveraging up, it's ultimately more risky.

Really I think it boils down to personal choice. Are you more comfortable having repaid it asap, or do you like to have more risk, in which case do you have the discipline to make sure you can eventually repay it. Note that in Switzerland you could just leave a big mess for your kids (since debts are also inherited).

Daniel
Sorry for stating the obvious but...

1. Your interest rate you can fix for 10 years into the future which is as long as the average person stay in their house.
2. The "notional rent" is part of the information you receive when you buy the house or at least you can ask the local commune for it.
3. Your marginal tax rate has little to do with the benefit or not of choosing which system - the system is designed to show only a marginal profit to home owners hence little tax difference - what is more important perhaps is the level of assets you have which you can remove with this big fat debt...
4. The interest on capital invested is likely to be at least as high as the mortgage interest rate.

I don't see this as a risk evaluation at all. If you assume that your property will not become negative equity then as long as you can meet the monthly payments there is not a problem living there. If you cannot meet the monthly payments then you have a problem as these are generally around 60% of what you actually would pay to live there and hence you would need to downsize dramatically.

And finally you would not leave a big mess for your kids as inheritance is optional in Switzerland. So if I am full of debt my kids can reject the inheritance.
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  #45  
Old 31.07.2007, 16:02
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Re: Property mortgages

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I also agree it is better to pay the minimum so I paid 0% down and pay 0% off per year. My mortgage rate is 3.375%...
Interesting deal. I guess you have collateral other than the property securing the 100% mortgage? From what you say you also got 100% at first mortgage conditions?

Daniel
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  #46  
Old 31.07.2007, 16:16
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Interesting deal. I guess you have collateral other than the property securing the 100% mortgage? From what you say you also got 100% at first mortgage conditions?

Daniel
Well not that I have used as security. They made me open a 3rd pillar pension and take out a life assurance policy for the 20% but that was all. And I have had the mortgage for 3 years now so when I signed up life was cheaper than today...
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  #47  
Old 31.07.2007, 16:23
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Re: Property mortgages

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Sorry for stating the obvious but...

1. Your interest rate you can fix for 10 years into the future which is as long as the average person stay in their house.
2. The "notional rent" is part of the information you receive when you buy the house or at least you can ask the local commune for it.
3. Your marginal tax rate has little to do with the benefit or not of choosing which system - the system is designed to show only a marginal profit to home owners hence little tax difference - what is more important perhaps is the level of assets you have which you can remove with this big fat debt...
4. The interest on capital invested is likely to be at least as high as the mortgage interest rate.

I don't see this as a risk evaluation at all. If you assume that your property will not become negative equity then as long as you can meet the monthly payments there is not a problem living there. If you cannot meet the monthly payments then you have a problem as these are generally around 60% of what you actually would pay to live there and hence you would need to downsize dramatically.

And finally you would not leave a big mess for your kids as inheritance is optional in Switzerland. So if I am full of debt my kids can reject the inheritance.
I would call wasting a good inheritance through financial imprudence "a big mess". Now spending it all on luxury lifestyle in your twilight years is another thread.

Agreed you can secure the interest rate at a price (currently quite high) and hedge your exposure, it is nevertheless remains an exposure.

Re the rental value you are right, however we new-built and didnt know until several months what it would come out at. I was just stating that it was a variable that you would feed into a purely rational decision.

Of course the marginal tax rate makes a difference: If your mortgage offset is saving you 40% (say in NE) or 20% (say in SZ) it makes a big 33% (ie 60 vs 80) in your effective post tax cost of borrowing.

Ask someone in Gloucester if they feel 100% secure there will not be any negative equity or some of the people sitting under the Zurich airport sudanflug when that started.

Finally, yes you are right that historically investments outperformed finance costs, but if you are reducing your decision horizon to just 10 years, you might get a nasty surprise (think back to the endowment scandal).

It's not playing roulette for sure, but I still maintain a 100% mortgage with some seperate repayment vehicle is going to be more risky than a straight repayment mortgage. Even more so if you dont have the financial discipline to manage it.

Danny
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  #48  
Old 31.07.2007, 16:24
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Re: Property mortgages

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Well not that I have used as security. They made me open a 3rd pillar pension and take out a life assurance policy for the 20% but that was all. And I have had the mortgage for 3 years now so when I signed up life was cheaper than today...
Makes sense: The 3rd pillar and life assurance payout will be secured, so it's effectively collateral.

Danny
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  #49  
Old 31.07.2007, 16:29
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Re: Property mortgages

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Of course the marginal tax rate makes a difference: If your mortgage offset is saving you 40% (say in NE) or 20% (say in SZ) it makes a big 33% (ie 60 vs 80) in your effective post tax cost of borrowing.
Right, I am not thick, well at least I don't think I am but I do not get this at all and I hate that more than smelly French cheese especially when I might be missing something related to taxes. Please explain...
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  #50  
Old 31.07.2007, 16:54
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I would call wasting a good inheritance through financial imprudence "a big mess". Now spending it all on luxury lifestyle in your twilight years is another thread.

Agreed you can secure the interest rate at a price (currently quite high) and hedge your exposure, it is nevertheless remains an exposure.

Re the rental value you are right, however we new-built and didnt know until several months what it would come out at. I was just stating that it was a variable that you would feed into a purely rational decision.

Of course the marginal tax rate makes a difference: If your mortgage offset is saving you 40% (say in NE) or 20% (say in SZ) it makes a big 33% (ie 60 vs 80) in your effective post tax cost of borrowing.

Ask someone in Gloucester if they feel 100% secure there will not be any negative equity or some of the people sitting under the Zurich airport sudanflug when that started.

Finally, yes you are right that historically investments outperformed finance costs, but if you are reducing your decision horizon to just 10 years, you might get a nasty surprise (think back to the endowment scandal).

It's not playing roulette for sure, but I still maintain a 100% mortgage with some seperate repayment vehicle is going to be more risky than a straight repayment mortgage. Even more so if you dont have the financial discipline to manage it.

Danny
I think you are still thinking too much like an Englishman. The Swiss property market is very unlike the UK one. All thoughts of finance aside, the Swiss property market is so small and tight, that it is (as I have said here before) not a real market.

As the last time the market started to overheat was 1990, there are no inflated prices to fall back as reported in the UK. There was no endowment scandal here AFAIK. And the Sudanflug has made little difference to prices, though selling will be slower...
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  #51  
Old 31.07.2007, 16:55
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Re: Property mortgages

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Right, I am not thick, well at least I don't think I am but I do not get this at all and I hate that more than smelly French cheese especially when I might be missing something related to taxes. Please explain...
Assume you have 300kchf income and live i) in Neuchatel ii) in Wollerau. You buy yourself a 1,500,000chf property (both with tax rental value 45,000chf). You have a 1,200,000chf mortgage at 3% (ie gross interest) 36,000chf. To amortize the mortgage you save in the 2nd and 3rd pillar 50,000chf (a bit much, so assume you have some top up capacity) so that you amortize the loan over 25-30 years.

As you sit in your lovely villa in Neuchatel and do your tax return, you end up with net tax deduction of +45000-36000-50000chf=-41000chf which has a tax impact of 19507chf per year tax times 25 years = 487kchf

In your pokey terrassenhaus in Wollerau, your saving is now only 8926chf per year or over 25 years = 223kchf.

The only difference was the marginal tax rate. Of course this is a theoretical example because you will still be paying 50kchf more taxes in total in Neuchatel on that sort of income, but it is to make the point that it can make quite an impact.

Daniel
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  #52  
Old 31.07.2007, 17:04
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Re: Property mortgages

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I think you are still thinking too much like an Englishman. The Swiss property market is very unlike the UK one. All thoughts of finance aside, the Swiss property market is so small and tight, that it is (as I have said here before) not a real market.

As the last time the market started to overheat was 1990, there are no inflated prices to fall back as reported in the UK. There was no endowment scandal here AFAIK. And the Sudanflug has made little difference to prices, though selling will be slower...
Probably true, not knowing if here for the long term, we only considered buying somewhere with very high liquidity, not necessarily for the price speculation but simply to know that it wasnt "for life". I would not want to risk having to spend six months plus trying to sell my place..

Re the endowment scandal and no Swiss scandals, I suspect its more to do with no one ever has to repay the mortgage than there are not some very poor expensive investments out there...

Daniel
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  #53  
Old 31.07.2007, 17:06
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Re: Property mortgages

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Assume you have 300kchf income and live i) in Neuchatel ii) in Wollerau. You buy yourself a 1,500,000chf property (both with tax rental value 45,000chf). You have a 1,200,000chf mortgage at 3% (ie gross interest) 36,000chf. To amortize the mortgage you save in the 2nd and 3rd pillar 50,000chf (a bit much, so assume you have some top up capacity) so that you amortize the loan over 25-30 years.

As you sit in your lovely villa in Neuchatel and do your tax return, you end up with net tax deduction of +45000-36000-50000chf=-41000chf which has a tax impact of 19507chf per year tax times 25 years = 487kchf

In your pokey terrassenhaus in Wollerau, your saving is now only 8926chf per year or over 25 years = 223kchf.

The only difference was the marginal tax rate. Of course this is a theoretical example because you will still be paying 50kchf more taxes in total in Neuchatel on that sort of income, but it is to make the point that it can make quite an impact.

Daniel
Now I understand. You are cheating.

I can still save my 50K in Pillars 2 and 3 and not have the house.
In this case the annual income variation is 9K assuming there is a 9K difference between the official rent rate and the rate of interest charged, which there ***might*** just be on 1.5 Mio. Then so what? 9K more deductions does not make a massive amount of difference... lets see 3.5K max and then that is on the house in Neuchatel... As I was saying before IF you buy a house the biggest saving will be on the difference between the mortgage payments you will need to make and the rent you would need to pay to live in the equivalent. Alternatively if you are asset rich then you have just taken on 1.2 Mio of debt. Which means you need to own 1.3 Mio of asset before you start paying any capital tax. Thats a lot of asset.
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  #54  
Old 31.07.2007, 17:21
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Re: Property mortgages

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Now I understand. You are cheating.

I can still save my 50K in Pillars 2 and 3 and not have the house.
In this case the annual income variation is 9K assuming there is a 9K difference between the official rent rate and the rate of interest charged, which there ***might*** just be on 1.5 Mio. Then so what? 9K more deductions does not make a massive amount of difference... lets see 3.5K max and then that is on the house in Neuchatel... As I was saying before IF you buy a house the biggest saving will be on the difference between the mortgage payments you will need to make and the rent you would need to pay to live in the equivalent. Alternatively if you are asset rich then you have just taken on 1.2 Mio of debt. Which means you need to own 1.3 Mio of asset before you start paying any capital tax. Thats a lot of asset.
Maybe a bit (;-), but I dont think you cant go to the other extreme and completely ignore the economics of eventually repaying the mortgage. And the ability to use the pension pillars for this is a special feature of the swiss tax system.

That said, 9kchf, or as you say 3.5kchf post tax is still enough to finance another 100kchf debt... you could borrow that an run a much nicer car... or take another holiday... lots of people would consider that a material difference.

Daniel
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Old 31.07.2007, 17:31
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Re: Property mortgages

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Maybe a bit (;-), but I dont think you cant go to the other extreme and completely ignore the economics of eventually repaying the mortgage. And the ability to use the pension pillars for this is a special feature of the swiss tax system.

That said, 9kchf, or as you say 3.5kchf post tax is still enough to finance another 100kchf debt... you could borrow that an run a much nicer car... or take another holiday... lots of people would consider that a material difference.

Daniel
I think perhaps my major point was that there are other ways to reduce your tax bill that are somewhat more efficient than playing with property. Ultimately as long as the interest payment and additional tax liability for own rent rate are more or less the same then there is no issue regardless of which route you take.

And don't forget 3.5K on 300K is not exactly rich pickings now is it. And if you look at the majority of people who are earning only 100-120K then you realise that the 3.5K will probably be only 1.5K and that is then diddly squat - less than Lobs lunch time bar bill for the year.
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  #56  
Old 31.07.2007, 17:40
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1.5K and that is then diddly squat.
Apart from Elton John most rich people I know are tight as hell! So perhaps you can transfer 1.5kchf diddly squat to my account IBAN12346789123456 I'm sure I can make it feel welcome ;-)

D
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Old 31.07.2007, 17:47
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Apart from Elton John most rich people I know are tight as hell! So perhaps you can transfer 1.5kchf diddly squat to my account IBAN12346789123456 I'm sure I can make it feel welcome ;-)

D
I tried and it came back incorrect IBAN number
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Old 01.08.2007, 13:33
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Re: Property mortgages

Richard

Thanks - that was a great explanation.

I have a few questions:

Is there a depreciation benefit in owning property. eg. on that $1.5m house, would you be entitled to claim depreciation of say 2% pa, ie. a further deduction of say 30k or about a reduction of 5-6k in your tax bill.

Also, the guide of 60% (that mortgage would be about 60% of your rent - would this be a good guide for the situation in zurich?

thanks alot
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Old 01.08.2007, 14:32
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Re: Property mortgages

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From what I have gathered, you are only obliged to pay of 1% per year. After that you CAN pay more. But most professionals* I have talked to so far say that it is more financially beneficial to pay only the minimum, as others here have said. Also, it was recommended that we pay up 40% then they pay interest only.

It's a system that doesn't compute in my limited math capacity brain... But that's what we have been recommended. Now if I could only find a house!

(Our offer on a farm house was rejected today... We now need to decide if we want to offer more or not....)

*Financial adviser, mortgage broker, real estate agents, and any other people I can convince to give me the secret ins & outs of the system.
These "financial professionals" will of course recommend paying the minimum. They get much more out of you in the long run by doing so, and then also you are able to afford a more expensive home, which certainly benefits them as well.

I don't understand the system myself either - but definitely do not plan to buy until I do. Be careful!
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Old 01.08.2007, 21:36
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Re: Property mortgages

After having many discussions in the UK in the past I have become a supporter of Interest only mortgages, certainly in the current (last 10 years) environment in the UK, but also looking at the Swiss market.

At the same time I am also a fan of a low cost tracker (UK) or low interest variable rate (Swiss)

One point that is important is that you should be able to afford your mortgage and an increase of 1% within 12-18 months should not cause you immediate financial problems.

In Switzerland, if you find the right deal, you can currently still borrow for your mortgage at approximately 3%. Any captital that you hold yourself should in my opinion be able to make a higher return than that. So why would you invest more than the required 20% captital in your house and why would you want to pay off your morgage and giving money back to the bank that elsewhere can give you a better return?
Also you should consider that if you have just 20% capital invested in your house any increase in price of your house is actually 5x more return. So if your 1,000,000 house (just good number as example) increases by 2% a year and you have invested 20% = 200,000, after 1 year the value of your house is 1,020,000, so a 20,000 increase over an investment of 200,000, so a return of 10% (or 15% if the price is going up 3%).
At the same time your mortgage is actually lower than what your friend would be paying for a similar property when he/she is renting.

Of course this logic only works in a market that is increasing, but the Swiss market is continuing the rise slowly and probably should actually increase faster when you benchmark it against other EU markets, like Netherlands and UK.
The bif difference seems to be the low % house ownership of the Swiss, but this now seems to slowly start to change, firstly because more Swiss are buying (following the buying trend and being dissolutioned by high rents) and secondly because it has now become much easier for EU citizens to buy and as more EU people discovering this the demand is rising and is starting to increase prices (and the supply is still much too low anyway).

Love to hear further supporting and opposing views.
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