Financing your own home: The path to a home of your own
The dream of owning your own home starts with solid financing. This is because if you want to buy residential property in Switzerland, you must meet two key requirements: Sufficient equity capital and proven affordability. Read on to find out what this means in concrete terms and how to best organize the financing of your own home.
How much money do you need to finance a house?
If you want to finance your own home in Switzerland, you should expect the following three key factors:
- Equity of at least 20% of the purchase price, composed of soft and hard equity
- 3-5% ancillary costs for notaries, land registers, and property transfer fees that have to be paid from liquid assets
- A gross income that satisfies the affordability rule of a maximum of one third of the annual housing costs
How much equity do you need to finance your own home?
To buy your own home in Switzerland, you need at least 20% equity capital. This figure is a standard set by the Swiss financial sector (FINMA). It protects both the lending bank against the risk of a fall in the property’s value and you yourself against taking on too much debt.
The more equity you contribute, the smaller the mortgage you will need. This has a direct impact on your costs: You pay less interest and have to amortize less.
Your equity is made up of hard and soft equity, i.e. your own savings as well as funds from your pension.
Hard equity capital (at least 10%)
Hard equity capital must come from funds that do not come from Pillar 2:
- Savings in savings and investment accounts
- Securities, fund and ETF custody accounts
- Pillar 3a (tied pension), by advance withdrawal or pledge
- Gifts and advances on inheritance
- Life insurance policies with surrender value
The minimum level of 10% equity capital is non-negotiable and is a prerequisite for financing your own home.
Purchase price, market value and loan-to-value ratio – what’s the difference?
- Purchase price: The amount that you contractually agree with the seller – may be above or below the market value, depending on the market situation.
- Market value: The objectively determined market value of the property, usually determined by an appraisal.
- Loan-to-value value: The value set internally by the bank that serves as the basis for the maximum mortgage amount.
Important: If the purchase price is higher than the loan-to-value ratio, which can be a realistic scenario in the current market situation, you will also have to cover the difference with your own funds.
Soft equity (maximum 10%)
Soft equity capital comes from Pillar 2 and supplements hard equity capital:
- Advance withdrawal from the pension fund
- Pledging pension fund assets
Because soft equity capital is made available from pension assets, an advance withdrawal always has a direct impact on your financial situation in retirement. For this reason, a pledge of pension fund assets is often the more elegant option because the pension capital remains intact.
Financing your own home without equity capital?
With traditional financing, it is not possible to buy a home without equity capital – 100% financing for a home is therefore virtually impossible in Switzerland So if you have the dream of owning your own home, you have to invest in a targeted way. In exceptional cases, such as in the context of gifts, advances on inheritance or additional security (existing real estate or land), home ownership can be financed without equity.
But in reality, buying a home without equity is very difficult because banks and insurance companies have clear minimum requirements.
What does affordability mean?
Affordability shows whether you can afford your own home in the long term. It assesses whether your income will be enough to cover ongoing costs in the future, even if interest rates rise.
This is why banks consider both equity capital and affordability when financing.
How is affordability calculated?
Banks and insurance companies check affordability according to a standardized, deliberately conservative model. Three cost items are included in the calculation:
- Imputed mortgage interest of 5% on the entire mortgage amount. The current market interest rate is not decisive.
- Maintenance and ancillary costs amounting to 1% of the market value per year (costs for heating, insurance, repairs, electricity, etc.).
- Amortization of the second mortgage within 15 years or until retirement age (around 1% of the market value per year).
The sum of these three items may not exceed one third (around 33%) of gross income. This is the key rule of thumb for Swiss mortgage lending to prevent homeowners from experiencing financial difficulties due to running costs that are too high.
Affordability examples
The following table shows the gross income required for different market values and 20% equity capital to ensure affordability:
Gross income for affordability
| Market value | Mortgage (80%) | Annual costs | Required gross income |
| CHF 800,000 | CHF 640,000 | CHF 46,400 | approx. CHF 140,000 |
| CHF 1,000,000 | CHF 800,000 | CHF 58,000 | approx. CHF 175,000 |
| CHF 1,250,000 | CHF 1,000,000 | CHF 72,500 | approx. CHF 220,000 |
| CHF 1,500,000 | CHF 1,200,000 | CHF 87,000 | approx. CHF 264,000 |
Gross income for affordability
| Market value | Mortgage (80%) | Imputed interest (5%) | Amortization (~1%) | Ancillary costs (1%) | Annual costs | Required gross income |
| CHF 800,000 | CHF 640,000 | CHF 32,000 | CHF 6,400 | CHF 8,000 | CHF 46,400 | approx. CHF 140,000 |
| CHF 1,000,000 | CHF 800,000 | CHF 40,000 | CHF 8,000 | CHF 10,000 | CHF 58,000 | approx. CHF 175,000 |
| CHF 1,250,000 | CHF 1,000,000 | CHF 50,000 | CHF 10,000 | CHF 12,500 | CHF 72,500 | approx. CHF 220,000 |
| CHF 1,500,000 | CHF 1,200,000 | CHF 60,000 | CHF 12,000 | CHF 15,000 | CHF 87,000 | approx. CHF 264,000 |
The table shows that if equity remains unchanged, gross income must rise at an above-average rate to ensure affordability for more expensive residential properties.
Why do banks expect interest rates of 5%?
The imputed interest rate appears high in the current market environment, but it corresponds to the approximate, long-term average of Swiss mortgage rates. With an interest rate of 5%, financial institutions ensure that people can afford to pay for their residential property even if the interest burden doubles or even triples due to rising mortgage rates.
What role does a mortgage play in financing your own home?
A mortgage is the backbone of financing your own home. Banks and insurance companies generally grant 80% of the purchase price for residential property as a mortgage.
For this borrowed capital, a distinction is made between the first and second mortgages:
First mortgage
- Can amount to up to 65% of the property value
- No obligation to amortize the mortgage as long as affordability is met
- Amortization possible
- Mortgage models Saron, fixed-rate mortgage, variable, or a combination thereof possible
- More attractive interest rates if you only need a first mortgage
Second mortgage
- Only required if less than one third of the purchase price is contributed as equity
- Can be up to 15% of the property value
- Obligation to amortize the mortgage within 15 years or by retirement
- Direct and indirect amortization possible
- Mortgage models Saron, fixed-rate mortgage, variable, or a combination thereof possible
- Often higher interest burdens
Mortgage models: Fixed-rate mortgage, SARON, and variable
There are basically three different mortgage models in Switzerland:
The three different mortgage models
| Fixed-rate mortgage | SARON | Variable | |
| Description | Fixed-term mortgage with fixed interest | Fixed-term, variable-rate mortgage with daily adjustment on a money market basis | Mortgage without fixed term and variable interest rates depending on market situation |
| Advantages |
|
|
|
| Interest rates | Fixed during the combined term | Variable – SARON incl. individual supplement | Variable – depending on the capital market situation |
| Term | Usually 1 – 10 years | 3 – 5 years | No fixed term, cancellation period of 3 – 6 months |
Many homeowners in Switzerland combine several models and terms in order to finance a property cost-effectively, smooth out the risks of interest rate fluctuations and thus create financial predictability.
Financing examples with mortgages
The following overview shows how the equity requirement and the amount of the first and second mortgages change at different market values:
Financing examples by market value
| Market value | Equity (20%) | First mortgage (65%) | Second mortgage (15%) |
| CHF 800,000 | CHF 160,000 | CHF 520,000 | CHF 120,000 |
| CHF 1,000,000 | CHF 200,000 | CHF 650,000 | CHF 150,000 |
| CHF 1,250,000 | CHF 250,000 | CHF 812,500 | CHF 187,500 |
| CHF 1,500,000 | CHF 300,000 | CHF 975,000 | CHF 225,000 |
If you bring in one third of your own capital to finance your home, you can do without the second mortgage altogether, thereby not only relieving yourself of interest, but also of the obligation to amortize the mortgage.
How to finance your own home
If you want to finance your own home, you have to make sound financial planning. This is the only way to ensure that the necessary equity capital and affordability are available to finance your own home.
The biggest challenge to financing is currently high real estate prices in Switzerland and the associated income thresholds: For a property with a market value of CHF 1 million, you need to prove equity of around CHF 200,000 and a gross income of around CHF 175,000 per year.
That’s why it’s crucial that you build up your own capital at an early stage to lay the foundation for financing your own home. Ideally, this would be a combination of Pillar 3a, investments and payments into the pension fund.
Frequently asked questions about financing your own home
What are the current mortgage rates?
Mortgage interest rates fluctuate continuously and depend on the type of mortgage and the term. You can find the current interest rates for mortgages from AXA on our overview page.
Can I finance my own home without using my own capital?
No, in general, the standard financing of your own home requires you to raise at least 20% of your own capital. In exceptional cases, less than 20% may be sufficient to finance your own home. However, banks and insurance companies draw up very detailed plans, which is why this rarely happens in practice.
What are the differences between the first and second mortgages?
The first mortgage finances up to 65% of the property’s value at favorable interest rates and does not have to be repaid. The second mortgage covers a further 15%, usually has a higher interest burden because of the higher risk, and must be repaid within 15 years or by the time of retirement.
How can I secure affordable housing after I retire?
Even if the second mortgage is paid off before you retire, housing costs can drain the limited budget of retirees. To avoid this, you have three options before you retire:
- Voluntary amortization of the first mortgage in order to reduce interest payments
- Pay into your pension fund to increase retirement income
- Buy a life annuity to increase your retirement income (by converting savings assets into a lifelong pension)
Reviewing your advance planning for retirement should help you decide on the best solution for you. Either way, however, you must have saved the necessary capital in good time. You should therefore take advantage of the times in which you can set something aside. A good way of doing this is through Pillar 3a – ideally in conjunction with term life insurance.
Written by:
Nadine Graf
Nadine Graf is a theme manager and writes texts for AXA on topics related to insurance and beyond.
