Mortgages – what and how much equity makes sense when buying a house

There are various ways to realize your dream of home ownership

Many factors play a role in financing a home of one’s own: personal situation, income, financial planning, as well as marital status and family. In addition, there are imponderables such as a divorce, unemployment or changing life plans. And of course the location of the desired property.

Finding a spacious, reasonably modern single-family home for CHF 1.2 million in the greater Zurich area is almost a matter of luck. If you have to shell out a million francs for a condominium, you are also well served. But whatever the rates, for a mortgage, at least 20 percent of the home’s value must be covered by equity. 240,000 or 200,000 francs must be provided in the above examples before any bank, pension fund or other mortgage lender will grant the loan.

Living dreams and life paths differ from case to case. But there are a number of questions that need to be addressed by anyone who takes out a mortgage and needs equity for it. The overview:

Why are two mortgages often necessary?

With the so-called first mortgage, usually a maximum of 65 to 70 percent of a home can be mortgaged. So if you only have 20 percent equity, the remaining 10 to 15 percent of the home loan must be financed by a second mortgage, which usually carries a slightly higher interest rate than the first mortgage. It is usually agreed between homebuyers and the bank that the second mortgage will be paid off in full over the course of the loan.

Does more than 20 percent equity make sense??

"In general, it can be said that the more equity brought, the better", is the advice of Cornelia Nestic, project manager at the consulting firm Hypothekenzentrum. Own funds reduce the loan-to-value ratio for residential property and improve the creditworthiness of mortgage customers as well as the affordability of a mortgage.

But even those who can raise more than the 20 percent equity requirement may consider using only the minimum initially. Because: "If you can invest money differently and with a higher return than you pay in mortgage interest, additional equity does not always make sense in terms of individual financial planning", says Nestic.

Mortgage interest rates are currently still historically low, and there is also a tax advantage to having a mortgage: "If you are young and have a good income, you should not initially put down more than 20 percent of your own capital," says Kay Foerschle, a marketing expert, says Kay Foerschle, head of marketing at mortgage broker Moneypark.

How should the equity capital be composed??

"Ideally, the equity comes from liquid assets, i.e. from one’s own bank account", says Cornelia Nestic. For liquid assets, people also like to use inheritance withdrawals or loans from family or friends. "Then again, securities can be sold and used as equity – there, however, you are of course dependent on the price." Others sell valuables or similar.

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 through pension assets.

Is the withdrawal of pension fund money tricky?

Pension decreases when money is taken from the second pillar. However, the withdrawal of pension fund money for home ownership is not regulated in the same way at all pension funds. In some cases, pension fund benefits for death and disability are also affected. Then additional insurance is necessary. A pledge of pension fund money as an alternative to withdrawal has the advantage that the insurance coverage is maintained.

Even if money from the second pillar is often used to buy a house, this is not necessarily the first choice from the advisor’s point of view: "We see the withdrawal of pension fund assets as the last resort, especially if the mortgage customer is already at an advanced age, says Cornelia Nestic of the mortgage center.

Pension fund money may generally not exceed 10 percent or half of the minimum equity capital, respectively. From the 50. Drawings are restricted after the age of 65.

Why is the third pillar often recommended as equity??

Pillar 3a funds are usually locked in until a few years before retirement. One of the few exceptions to early withdrawal is the purchase of one’s own roof over one’s head. Third pillar can be used for equity, but also to pay off a home loan. When a portion of the mortgage is repaid, all that happens is that the equity portion of the home is increased.

"Regarding the repayment of the second mortgage, the indirect amortization through the payment into the pillar 3a is recommended, and depending on the circumstances also 3b", says Kay Foerschle. The maximum contribution for pillar 3a is currently 6768 francs per year. An important incentive for this type of financing: "In this way, the tax advantage of pillar 3a savings can be used at the same time, Foerschle says.

Are equity considerations age-dependent?

At retirement age should no longer be the maximum of 80 percent mortgage, according to the advice of Moneypark. The maximum recommended for this age is 65 percent. To pay off the mortgage, 1 percent of the home’s value should be repaid year after year. Towards retirement age, it is also advisable to repay part of the first mortgage.

On the one hand, reducing the loan-to-value ratio to 60 percent or even below increases financial flexibility. For a mortgage, one’s own assets and income must be sufficient to meet the banks’ imputed interest rate. Even though the interest rate on a 10-year mortgage can currently be 1.25 percent low, borrowers must be able to withstand a theoretical interest rate of about 4.5 to 6 percent. For people of retirement age, this can become a problem, because once they retire, their income is quickly at least 20 percent lower.

But care should be taken on the other hand not to lose too many assets through amortization. A home of one’s own can always give rise to 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 on. The income situation after retirement is decisive."

Do you need reserves despite equity?

The banks’ affordability interest rate takes into account maintenance and ancillary costs. Additional costs for houses are besides insurance premiums all possible fees, renovations, repairs and the maintenance of a garden. In condominium ownership, the owners of a property jointly bear the maintenance costs.

So in addition to equity and amortization, as a house or apartment owner you have to think about 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 one million francs, 10,000 francs must be available year after year. The rule of thumb is again that about two thirds of this should be earmarked for maintenance and one third for ancillary costs.

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