Which and how much equity capital makes sense when buying a house.
If you want to buy a house or an apartment, you need a lot of money – without equity there is no even the cheapest mortgage. However, there are a few points to bear in mind when using your own funds.
Many factors play a role in financing your own home: personal situation, income, financial planning as well as marital status and family. In addition, there are uncertainties such as divorce, unemployment or changing life plans. And of course the location of the desired property.
Finding a spacious, reasonably modern detached house for CHF 1.2 million in the greater Zurich area is almost lucky. Anyone who has to spend a million francs on a condominium is also well served. But whatever the price, a mortgage must cover at least 20 percent of the value of your home with equity capital. In the above examples, 240,000 or 200,000 francs must be provided before any bank, pension fund or other mortgage financier can obtain the loan.
Housing dreams and life paths vary from case to case. But there are a number of questions that all those who take out a mortgage and need their own funds for it have to deal with. The overview:
Why are two mortgages often necessary?
With the so-called first mortgage, a maximum of 65 to 70 percent of a home of one’s own can usually be lent as collateral. So if you have only 20 percent equity, you have to run the remaining 10 to 15 percent of the home loan on a second mortgage, which is normally subject to a slightly higher interest rate than the first mortgage. Usually, the house buyer and the bank agree that the second mortgage is fully amortized in the course of the mortgage.
Does more than 20 percent equity make sense?
“Basically, it can be said that the more equity you bring with you, the better,” says Cornelia Nestic, project manager at Hypothekenzentrum. Own funds reduce the loan-to-value ratio of home ownership and improve the creditworthiness of mortgage customers as well as the affordability of a mortgage.
But even if you can raise more than 20 percent of your own funds, you may consider using only the minimum at first. Because: “If you can invest money differently and with higher returns than you pay mortgage interest, additional own funds do not always make sense in terms of individual financial planning,” says Nestic.
At present, mortgage interest rates are still historically low, and a mortgage also has a tax advantage: “If you are young and have a good income, you should not initially contribute more than 20 percent equity,” says Kay Foerschle, Head of Marketing at mortgage broker Moneypark.
How should the equity capital be composed?
“Ideally, equity should come from liquid assets, i.e. your own bank account,” says Cornelia Nestic. For liquid assets, inheritance advances or loans from family or friends are often used. “Then securities can be sold and used as own funds – but of course you are dependent on the price.” Others sell valuables or the like.
Half of the equity should come from such sources. That makes 10 percent “hard” equity on the value of the property. The other 10 percent for the equity requirement can be financed by pension funds.
Is drawing pension fund money tricky?
The pension decreases when money is withdrawn from the second pillar. However, not all pension funds have the same rules for drawing pension fund money for home ownership. Some pension fund benefits for death and disability are also affected. Then supplementary insurance is necessary. A pledge of pension fund money as an alternative to withdrawal has the advantage that the insurance cover is maintained.
Even though money from the second pillar is often used to buy a house, this is not necessarily the first choice from the advisors’ point of view: “We see the withdrawal of pension fund assets as a last resort, especially when mortgage customers are already at an advanced age,” says Cornelia Nestic from the Mortgage Centre.
As a rule, pension fund assets may not exceed 10 percent or half of the minimum equity capital. Drawing money is limited from the age of 50.
Why is the third pillar recommended as equity capital?
Pillar 3a funds are normally blocked until a few years before retirement. One of the few exceptions to early withdrawal is the purchase of your own roof over your head. The third pillar can be used as equity but also to repay the home loan. When a part of the mortgage is amortized, nothing else happens but that the equity portion of the home is increased.
“With regard to the repayment of the second mortgage, indirect amortisation is recommended by paying into pillar 3a and, depending on the circumstances, also 3b,” says Kay Foerschle. The maximum contribution for pillar 3a is currently CHF 6768 per year. An important incentive for this financing: “In this way, you can also take advantage of the tax advantage of pillar 3a savings,” says Foerschle.
Are equity considerations age-dependent?
According to Moneypark’s advice, there should no longer be a maximum of 80 percent mortgages at retirement age. A maximum of 65 percent is recommended for this age group. In order to amortize the mortgage, 1 percent of the owner-occupied home value should be repaid year after year. In addition, it is advisable to pay back part of the first mortgage at retirement age.
On the one hand, reducing the loan-to-value ratio to 60 percent or even less increases financial flexibility. For a mortgage, one’s own assets and income must be sufficient to meet the imputed interest rate of the banks. Even if the interest rate for a 10-year mortgage can currently be 1.25 percent low, debtors must be able to endure a theoretical interest rate of around 4.5 to 6 percent. For people of retirement age, this can become a problem because they will soon have at least 20 percent less income with their pension.
On the other hand, however, care should be taken not to lose too much wealth through amortization. A home of one’s own can always cause new costs, which may necessitate an increase in the mortgage. Kay Foerschle says: “It can be difficult for pensioners to increase the mortgage again later. The decisive factor is the income situation after retirement.”
Do you need reserves despite equity capital?
The banks’ interest rate on portability takes into account maintenance and ancillary costs. In addition to insurance premiums, additional costs for houses include all possible fees, renovations, repairs and the maintenance of a garden. In the case of condominium ownership, the owners of a property jointly bear the maintenance costs.
In addition to the equity capital and the amortization, the owner of a house or condominium must also consider other available funds. The rule of thumb is that 1 percent of the property value must be set aside annually for maintenance costs: So if a house costs CHF 1 million, CHF 10,000 must be available year after year. The rule of thumb states again that about two thirds of this should be earmarked for maintenance and one third for ancillary costs.