Mortgages
Financing an investment property
When interest rates are low and stock markets volatile, buying property is an alternative investment option. Comparis explains the key issues relating to financing and explores the associated challenges and opportunities.
What is an investment property?
Investment or buy-to-let properties are usually those purchased by investors (private individuals or legal entities) in order to augment their monthly income. Rather than being occupied or used commercially by the owner, the property is rented out to a third party.
What financing conditions and affordability criteria apply to investment properties?
Private buyers must usually fulfil the following conditions to obtain a mortgage on a residential investment property:
Deposit of at least 25% of the collateral value (collateral value is based on the earnings value and not the market value)
Reduction of mortgage debt to two thirds of the collateral value within 10 years
Lowest value principle (example: if the purchase price of a property is 1 million francs and the bank values it at 900,000 francs, the bank's value of 900,000 francs is used to calculate the collateral value)
No withdrawals from pillars 2 and 3 for the deposit
By contrast: if you buy a home that you are going to live in, you usually have to pay a deposit of 20% of the purchase price, of which 10% can come from retirement savings. If you borrow more than 65% to finance residential property, the mortgage debt must be reduced to two thirds of the collateral value within 15 years or by time you reach retirement age.
Finance can be obtained not only from banks, but also from pension funds, insurance companies and investment foundations. Mortgage rates can vary significantly from one lender to another. Independent mortgage experts have extensive knowledge of the various lenders’ rates and conditions and are often able to obtain better deals.
What factors are important in the purchase of an investment property?
Location: the location is important for determining how much rent you can feasibly charge. Location-related factors include the economic attractiveness of the region, public transport connections and the educational infrastructure. Usually, the better the location, the higher the purchase price.
Tenancy law: tenancy regulations in the different cantons affect the attractiveness of property investments. For example, landlords in the canton of Geneva are not allowed to increase the rent immediately after renovating a property.
Building structure: form your own impression of the condition of the property and what renovation and maintenance work will be necessary. Request a list of the required renovation and modernization work in writing. Non-experts should seek the advice of a property expert before buying. Stability of rental income: banks calculate affordability based on the income of the mortgage borrower and the current rental income. If the rental income exceeds the mortgage, amortization and ancillary costs, the property will yield a taxable profit. Invest in property that has good prospects of generating a stable or increasing rental income.
What are the benefits of investing in property?
Extra income: rent from a property provides an additional source of income each month. It can be used to supplement pension income.
Protection from inflation: property and rental income offer a certain level of protection against inflation.
Diversification: direct investments in property can help mitigate fluctuations in the value of other investment types such as shares or bonds.
Increase in value: if demand for housing is higher than supply, property prices tend to go up.
What challenges can property investors expect?
Concentration risk: if most of your assets are invested in the property, you risk hefty losses if the property loses value. Decreasing rental incomes may also reduce the value of the property.
Vacancy risk: depending on the region, location and rent levels, there is a risk of the property being repeatedly vacant, which eats into your profits and makes it harder to take out a mortgage.
Management, maintenance and renovation: a property must be managed. For a fee, this work can be outsourced to a professional property management company. Properties cost money to maintain and have to be renovated in accordance with building and environmental regulations.
Legal changes: changes to tenancy law, for example, can lead to fluctuations in value on the property market.