Below stands a guide describing a simple introduction to the main topics related to a property acquisition in Switzerland. Of course, feel free to contact us for further information.
Equity represents the contribution you will make to purchase property in Switzerland. Generally, the mortgage loan granted by financial institutions is 80% maximum, the 20% of the purchase price must therefore be completed with your personal funds: your savings, your investments, your 3rd pillar, your pension funds (2nd pillar), a gift or an advance on inheritance, a loan from a third party or a building property. Since July 2012, it is required to contribute at least 10% from your personal funds that do not come from your pension funds or from a loan from a third party.
There are different categories of property taxation when you become owner:
- Wealth Taxation: The tax value of your property is added to your wealth. On the other hand, you can deduct the capital value of your mortgage
- Income Taxation: When acquiring your principal house, the tax administration will calculate a rental value and add it to your annual income. However, you can deduct the annual mortgage interest and the cost of maintaining your home. The tax value and the rental value generally represent an annual tax deduction which differs between cantons.
- Additional real estate tax: This annual cantonal tax is generally calculated in "per thousand" of your property's tax value. This does not consider the annual tax deduction or the mortgage capital deduction. If your property is labeled high performance or very high energy performance (Minergie), it is possible to request an exemption from the additional tax in some cantons.
- Taxation on Real estate profit : If you realize a profit when selling your property, you will be taxed on this amount. Generally, the tax on the capital profit is degressive according to the duration of the property possession. If you realize a real estate profit on your main house and this is used to acquire a second principal residence, you can benefit from a re-use of the real estate profit: You will not pay the real estate profit tax during resale. This will be carried over to the new main residence.
The 2nd pillar can be used in two ways for a real estate purchase (main residence only):
- By early withdrawal of all or part of your second pillar.
- By pledging your second pillar.
In the first case, you constitute a part of your personal funds by withdrawing an amount from your second pillar. It is important to note that this will decrease your pension benefits once the withdrawal is made. A tax on capital benefits withdrawal is due (between 3 and 10% of capital withdrawal amount, depending on your marital status, the amount and the city). In case of a full refund of the withdrawal, the paid taxes will be reimbursed. Using your 2nd pillar for purchasing a real estate may be more complicated if you have made a buyback in the three years before the capital withdrawal.
In the second case, you put your pension funds as a pledge for the mortgage. This does not generate a rise to any tax or reduction of old-age profits. However, insurance coverages are generally requested by financial institutions when granting the mortgage
The 3rd pillar, banking or insurance, can be used in different ways during a real estate purchase:
By withdrawing it in order to constitute personal funds or proposing it as a guarantee.
In the first case, the withdrawal of the 3rd pillar generates a tax on the withdrawal of pension funds (this varies according to your marital status, the amount and the city, estimated between 3 and 10%).
In the second case, the third pillar can be used as pledge for the mortgage you are about to contract and can be used to amortize the mortgage indirectly: The amount of the annual premiums must cover the amount of amortization requested by the bank.
The additional costs related to a real estate purchase in Switzerland generally consist in:
Notary fees: All costs, taxes (transfer taxes), and fees related to the real estate transaction. These are generally estimated to about 5% of the purchase price in Geneva and Vaud, but this percentage may change according to the canton.
Amortization is the repayment of the mortgage. Usually, financial institutions require the 2nd rank mortgage to be repaid over 15 years or at the latest before the legal retirement age. The repayment may be quarterly, semi-annually or annually.
There are two types of amortization for a main residence:
- Direct amortization: You repay your mortgage each year directly to the financial institution, which reduces the amount of the loan each year, but this decreases your annual tax deductions.
- Indirect amortization: Rather than repaying the annual amortization each year to reduce the mortgage, you pay it from the 3rd pillar to get profit from the tax deductions on the related income. Your interest charge will remain constant, as well as your annual tax deduction. Your mortgage will then be reduced from the amount saved on the 3rd pillar to the retirement age and / or maturity of the life insurance policy.
If you withdraw your pension funds to make up part of your personal funds for a real estate purchase, you will be taxed on the withdrawal of the concerned funds. This changes according to your marital status, amount and city of taxation (between 3 and 10%).
These fees are not considered by the financial institutions when granting the mortgage, they are at your expense.
The mortgage note is a title issued by the Land Registry. It is required by the financial institution as a guarantee for the mortgage. The notary sends the mortgage note to the bank, in exchange for the amount of the mortgage. The mortgage note must always be linked to a property, otherwise it vanishes.
A mortgage note that is no longer subject of a guarantee can be reused by its owner in different cases:
- To contract another mortgage (to finance property renovations or transformations)
- The mortgage note can be moved to a new property purchase in the same Canton
- The mortgage note can be transferred to a third party (i.e. In the case of a real estate sale, it is entirely possible to give or sell your mortgage note to the buyer).
This is the mortgage that the financial institutions will propose to let you to purchase the desired property. The mortgage is usually divided into two "ranks":
The 1st mortgage generally covers the first 66% of the loan on the purchase price
The 2nd mortgage covers everything that exceeds the first 66% of the loan and this amount should be repaid in 15 years or before the legal retirement age.
The maximum mortgage you can get on a property in Switzerland is generally 80% if the financial institutions consider the property as a standard one. This can be reduced to a lower percentage for various reasons: Your age, the type of property and the use of it. As example, a holiday residence or luxury property is generally financed at 66% of the purchase price.
Financial institutions propose mortgages made of different types of rates. You can choose different rates for your mortgage: Fixed or variable with different durations usually from 1 month to 15 years. It is possible to spread your mortgage on different rates with different durations depending on your financial strategy and your expectations. This is called the "mortgage split" system.
In case of early termination of the mortgage, financial institutions claim an exit fee (penalty).
In the canton of Geneva only, Casatax is a reduction of the registration fees when purchasing a property. You can benefit from this reduction only on the purchase of a main residence in Geneva at the maximum price of CHF 1'165'867.- (scale 2017, indexed value each year). If you meet these criteria, you get a reduction on transfer duties of CHF 17'765.- and the registration fees on mortgage note are reduced by half. You must occupy the property for a continuous period of at least 3 years, otherwise the reduction you have received must be repaid (exception: death of the beneficiary).
In the event of early termination of a mortgage with a fixed term, financial institutions will normally require an early termination indemnity or an exit penalty. The considered parameters for the calculation of the penalty are generally the remaining loan amount, the remaining duration and the rates difference between the date your mortgage start and its termination date. This penalty can be very expensive depending on the parameters mentioned above and it is therefore important to anticipate this potential problematic when choosing the strategy of your fixed rates.