Mortgage ABCs: comparis.ch explains the most important technical terms from the world of mortgages.
The affordability of a property is expressed as a ratio between the estimated costs associated with the purchase of a property and a person's gross income. As a rule, the living costs should not exceed one third of the gross income. The affordability ratio is cited as a percentage.
Amortisation generally means paying off a mortgage in multiple, fixed instalments. Amortisation can be indirect (using a pillar 3a account) or direct (making repayments to reduce the mortgage debt).
Ancillary and maintenance costs
Ancillary costs refer to the costs for water, electricity, heating and caretaking. Maintenance costs cover everything relating to the repair and upkeep of the property. Lenders assume that around 1 per cent of the property’s market value will be spent on ancillary and maintenance costs per year.
This takes place when a property is sold at auction. The property is usually sold to the person bidding the highest amount.
The building area is an area that is defined as building land.
Building zones are areas of land that may be built upon. Local authority building and zoning regulations are used to define the zoning plan.
This official document shows the boundaries of properties, markings, buildings and permanent structures.
Capital gains tax on property
Anyone selling a property must pay capital gains tax to the canton. The tax is calculated by the local municipality.
This describes the areas of a property used for access purposes, i.e. entrance halls, staircases, ramps and so on.
Condition of the property
The exterior and interior condition, as well as the condition of the building is used to define the condition of a property.
In this form of collective ownership, the owner may use, manage and alter certain parts of the building.
Consolidation refers to the conversion of a building loan into a mortgage, usually when building is completed.
Co-ownership refers to a type of shared ownership (see "Forms of ownership").
Expressed as a fraction in hundredths or thousandths, the co-ownership share represents a condominium owner's share in a property.
With each mortgage repayment, the mortgage debt, as well as the mortgage interest owed, is reduced.
Early redemption fee
If a mortgage is redeemed before the end of its term, the borrower must pay a penalty called the early redemption fee or early repayment charge.
Easements that reduce value
Examples of easements that reduce the value of a property include construction bans and rights of habitation.
Equity for the deposit can include savings, inheritance, gifts, sweat equity and early withdrawal of pension funds. As a rule, the buyer should contribute 20 per cent of the investment costs in the form of equity in order to finance a residential property purchase.
A property owned and occupied by a family is specially protected by the law: legal transactions may only be completed with the agreement of both spouses.
Financing property using retirement savings
You can use both your occupational pension (second pillar) and your private pension (third pillar) to finance a home you will live in either by pledging the money or withdrawing it early.
In Switzerland, lenders normally offer a first mortgage for loan-to-value ratios of up to two thirds of the market value.
A fixed-rate mortgage is a mortgage with a fixed rate and term. The interest rate remains constant for the entire repayment term, irrespective of market developments.
Loans have agreed terms. Fixed-rate mortgages and LIBOR mortgages must reach the end of their term before they can be redeemed. If the mortgage is redeemed during the term, the borrower will be charged an early redemption fee.
Forms of ownership
In Switzerland, there are three types of home ownership:
- Sole ownership: one person is granted all rights and responsibilities
- Joint ownership: the partners must dispose of all shares by joint agreement
- Co-ownership: each partner is entitled to their defined share of the property (co-ownership share)
Forward mortgage and fee
A forward mortgage allows you to fix the mortgage rate in advance – usually up to 12 months before the beginning of the term. Some lenders also allow you to lock in the interest rates up to 24 months in advance. In return, the borrower is required to pay a fee when they take out the forward mortgage. This fee varies according to time and cost.
Functional areas are spaces that house building services equipment and appliances (tank rooms, lift installations, etc.).
A person acting as a guarantor for a mortgage agrees to pay the debt of the principal borrower if this borrower fails to pay.
In this case, you pay into your restricted pension plan (pillar 3a) instead of repaying the mortgage directly.
Investment costs can refer to the overall cost of purchasing a plot and constructing a property (land, ancillary building costs etc.). They can also describe the total cost of purchasing an existing property, including any renovation costs.
Joint ownership is a type of shared ownership (see "Forms of ownership").
The land register is an official register held by a local municipality that records every property or plot of land along with associated legal information.
LIBOR (London Interbank Offered Rate)
The LIBOR is used as a reference interest rate and is announced at 11 o’clock each day in London. Banks use these interest rates to lend to each other.
With a LIBOR mortgage, the margin set for the customer is fixed during the term of the mortgage. Each quarter, the banks check the LIBOR rate and may adjust the customer rate accordingly (customer margin + LIBOR rate = customer rate).
As a rule, a LIBOR mortgage is taken out for a period of, say, three years. However, the interest rate is fixed for a selected period, e.g. 1, 3, 6 or 12 months, and can be adjusted at the end of this period in accordance with the LIBOR rate.
The ratio of the mortgage to the market value is referred to in the mortgage world as the loan-to-value ratio. This value is expressed as a percentage.
The quality of a location can be defined by factors such as the view, transport connections and how much sun the property receives, and affects the market value and price of a property.
Market value and market value appraisal
The market value is the price at which an expert considers a property should be put up for sale. The process for determining this value is called a market value appraisal.
Minergie standardMinergie standard is a building standard that supports efficient use of energy from renewable sources and an improved standard of living. Owners who adhere to Minergie standards receive a Minergie certificate.
A mortgage is a traditional type of loan used to finance a property purchase.
If you are interested in taking out a mortgage, you can work out affordability and the loan-to-value ratio using the mortgage calculator.
The mortgage certificate in Switzerland is a type of security that gives rise to a personal debt and is secured by a mortgage. When a mortgage is granted, the lender takes the mortgage certificates as security. The debtor is liable with not only the mortgaged property, but also his entire assets.
Paper mortgage certificate
A paper mortgage certificate is a document of title that requires a notarized deed. This document of title is issued either in bearer form (bearer mortgage certificate) or in registered form (registered mortgage certificate). A paper mortgage certificate must be stored safely.
Paperless mortgage certificate
A paperless mortgage certificate also requires a notarized deed between creditor and debtor. The paperless mortgage certificate is issued in the name of the creditor or the owner, and is a registered lien. No security is issued. Paperless mortgage certificates are usually managed by the company SIX.
Developments on the money and capital market influence the mortgage rate.
Net living space
The net living space describes the habitable areas of a property. These include interior rooms, staircases, corridors and hallways.
Notional interest rate
Lenders apply a notional interest rate for the purpose of calculating affordability. Set at 5 per cent of the mortgage amount, the application of this rate ensures that the mortgage can still be repaid should interest rates rise.
Pledging means promising to provide something as security on a loan. In the context of mortgages, a borrower can improve their credit standing by pledging additional assets (from sources such as the third pillar, occupational pension fund or securities).
If a loan to finance a property purchase is provided by a third party such as a relative, this is known as a private mortgage.
The purchase price is the effective price, i.e. the price at which the property is bought, excluding taxes, transaction costs and fees.
Before you buy a house, a mortgage lender will issue you a quote. This contains the rates and conditions at which a mortgage will be approved for your property.
A renovation fund is used to finance renovations to a multi-family apartment building (e.g. new roof). Condominium owners make annual payments into the fund to help them manage the cost of the work.
Reservation agreement and reservation payment
To record agreements reached on the sale of a property as quickly and easily as possible, the seller and potential buyer can sign a reservation agreement. The prospective buyer signs a statement to the effect that he/she will not withdraw from the purchase. In return, the seller declares that he/she will not attempt to sell the property elsewhere. A reservation payment is then often required. A reservation agreement is for personal use only – it is not a legal contract.
Right of first refusal
A right of first refusal lasts for a maximum of 25 years. If a property is for sale, the holder of a right of first refusal is able to purchase it at a predefined price or at the market value.
Right of habitation
The right of habitation comes into play when parents reaching old age wish to transfer a property to their children but still wish to continue living in the property. Holders of a right of habitation have only the right to live in the property, not to rent it out. The children are responsible for costs such as mortgage interest and insurance, while the parents pay maintenance costs such as heating and ancillary costs. However, the parents continue to pay tax on the imputed rental value.
Right to build
Lasting for a limited period, a right to build gives a person the right to erect a building on and under someone else’s land.
Interest on the right to build
The person granted the right to build pays interest to the owner of the land. The interest rate can be linked to an inflation index (e.g. the Swiss consumer price index) or to the reference interest rate of the Federal Office for Housing.
When the period of the right to build expires, ownership of the erected building is transferred to the owner of the land. The land owner is required to pay an appropriate compensation fee for this. This fee is defined prior to conclusion of the agreement.
A LIBOR mortgage is also referred to as a rollover mortgage.
When a property is sold, the sales contract must be officially notarized so that the owner is entered into the land register.
Borrowers who can only provide a deposit of less than a third of the market value (in other words, the loan-to-value ratio is between two thirds and 80 per cent of the market value) will need to complement their first mortgage with a second mortgage. This mortgage must be paid back within 15 years or by retirement either directly or using pillar 3a.
The second pillar – or occupational pension – can be used by borrowers to finance their property purchase. A condition is that the borrower must live in the property.
There are two types of shared ownership – joint ownership and co-ownership (see "Forms of ownership").
In this scenario, only one of the spouses or cohabiting partners raises the capital to purchase the property. The sole owner has full rights and responsibility for the property and is the person whose name is entered in the land register.
This type of mortgage involves splitting the loan into multiple portions or “tranches”. Most lenders stipulate a minimum tranche of 100,000 francs, otherwise you are free to select the amounts for each tranche.
Standard of finish
The standard of finish describes the quality of the fixtures and fittings in a property. The higher the quality, the higher the value of the property.
Any building and conversion work carried out by the property owner is referred to as “sweat equity”. Under certain conditions, this can also count towards the deposit.
You can deduct mortgage interest, maintenance work, payments into pillar 3a and your occupational pension fund from your taxable income – thereby reducing your tax bill.
Pillar 3a is a restricted pension plan available to employees and self-employed persons who pay tax in Switzerland. Payments made into the plan can be deducted from taxable income up to a legally defined maximum amount. You may withdraw money from pillar 3a in the following circumstances:
- To purchase a residential property you are going to live in yourself
- During the first year of self-employment
- From 5 years before legal retirement age
- To pay extra into an occupational pension (second pillar)
- If drawing a disability pension
Pillar 3b is an unrestricted pension plan that is open to everyone and is set up like a savings account. There are no legal restrictions with regard to accessibility and no tax advantages.
Usufruct is when an owner gives another person (the usufructuary) permission to use the property themselves or to rent it out. The usufructuary is responsible for maintenance, the mortgage, insurance and so on, and must declare the imputed rental value on their tax return. However, the interest on the mortgage and maintenance expenses may also be deducted from their taxable income.
This type of mortgage has no fixed term and can be redeemed at any time. The interest rate is set by the lender.
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