Buying a home: equity and affordability clearly explained
How much equity you need for a house or a freehold flat, how banks calculate affordability and what a financing confirmation does for you.
If you buy a freehold flat or a house in Switzerland, you need equity and must convince the bank that the housing costs remain affordable even if interest rates rise. The rules are similar at most banks.
Equity: at least 20 per cent
Banks generally finance no more than 80 per cent of the purchase price (or of the lower market value). You contribute at least 20 per cent yourself. Of this, at least 10 per cent should be “hard” equity, i.e. not from the pension fund (2nd pillar) – such as savings, pillar 3a, gifts or advances on inheritance. You can cover the rest through an early withdrawal or a pledge of your pension fund assets.
Affordability: how the bank calculates it
The bank does not calculate with the current interest rate but with a notional interest rate, usually 5 per cent. On top of that come ancillary and maintenance costs of around 1 per cent of the purchase price per year, plus amortisation: the mortgage must be reduced to two thirds of the lending value within 15 years. As a rule, these costs should not exceed one third of your income.
A worked example
Purchase price CHF 1'000'000, equity CHF 200'000, mortgage CHF 800'000:
- Notional interest rate 5 %: CHF 40'000 per year
- Ancillary and maintenance costs 1 %: CHF 10'000 per year
- Amortisation from CHF 800'000 to around CHF 666'700 over 15 years: around CHF 8'900 per year
Total around CHF 58'900 per year. For these costs to make up no more than one third, you need an income of around CHF 177'000 per year. In addition, the purchase involves incidental costs for the notary, the land register and – depending on the canton – property transfer tax.
Financing confirmation: your advantage when buying
Sellers prefer buyers who can prove their financing. Ask your bank to issue a financing confirmation or a pre-approval. On this platform you upload it to your profile once, together with proof of your own funds – so providers can see that you are a serious and solvent buyer.
Frequently asked questions
How much equity do I need for a house?
As a rule, at least 20 per cent of the purchase price, of which at least 10 per cent must not come from the pension fund. On top of this come the incidental purchase costs.
Why does the bank calculate with an interest rate of 5 per cent?
So that the housing costs remain affordable even if interest rates rise sharply later on. The actual interest rate is usually lower.
Can I use money from my pension fund?
Yes, through an early withdrawal or a pledge – but only for the part of the equity that exceeds the 10 per cent of “hard” equity.
What is a financing confirmation?
A confirmation from your bank that it will finance the purchase up to a certain amount. It shows sellers that you can raise the purchase price.