Mortgages in Switzerland - worried about having a loan forever!

Accomodation, House and Garden
1
Hello Forum people,

My husband and I are thinking of buying a house or apartment in the Geneva area. We did our research about prices and mortgages, and it seems the bottom line is yes, we can afford one. But: we will have a very big loan, forever. Probably well over half a million. Forever

I understand this is standard in Switzerland but I don't understand how people accept this risk. What am I missing? I'm sure I'm not the only one worried about finding myself happily retired and suddenly having to pay a 5% interest rate on my significant home loan.

Any experience or tips? Do risk-averse people like me just go ahead and gradually pay off the entire loan (even though I believe that's not wise for tax reasons)? Not buy? Or just take a deep breath?

Thanks!

2
Take a deep breath.

At current rates paying off a mortgage is pointless. With a 5 or 10-year fixed mortgage, you can see rate rises coming well in advance.

CHF500,000 is not a massive commitment and you should be able to secure one for 10 years at 1.69% (today's ZKB) = CHF704 a month.

If you work/ed for a bank/insurance you can benefit for staff discounts of 1% off rates.

What are you waiting for??

3
Nobody is preventing you from repaying more of the principal than the minimum required (35% of property value by the retirement age).

You can request 2% annual principal repayment or just put the money into pillar3 account and use it every 5 years to reduce the debt.

It's just that it's not worth doing it with current mortgage interest rates - better invest cash elsewhere and then use the proceeds to reduce the mortgage if the rates start going up (but you can still buy yourself the peace of mind for at least 10 years)

4
Thanks for this! Really I'm more worried about the 20/30/50 year horizon. Is that crazy? And when I do see rates rising - what will be my options?

5
Once you go for capital repayment over 20 years your payments will be roughly 5 times what your paying now..... it's one of the reasons prices are high as affordability is fudged by not repaying the full loan

6
Fellow risk averse person here. “Hi there!”

Continue renting is my advice, can afford to buy too and will keep on renting as I am not comfortable with the risk at the current interest rate levels and the inflexibility and additional responsibilities of owning a house.

The interest rate risk is two fold, the mortgage payments going up if interest go up and the loss on the house value as the prices reverse the explosion in house prices that was mainly driven by cheap money. (Not many people seem to grasp this and are sleep walking into financial disaster).

Not to mention the FX risk if you plan to retire outside Switzerland. In the worst case scenario you reach retirement age when your fixed mortgage is due for renewal, interest rates are between 5% and 10%, the House you bought is worth 20% less in real terms and your expected pension just about pays for the mortgage or you can pay it off with a lump sum and will be left with nothing else to retire on. Hopefully you can still afford the bill for dignitas!

So KEEP CALM and CARRY ON RENTING. It’s no different than renting from the bank (i.e having a mortgage) specially when the savings compared to renting don’t justify the risk! (20% correction on a CHF1m property will wipe out rental savings of around 17 years, assuming CHF1k per month saving of buying vs rental)

If you have millions out there and are happy taking the risk for the sake of having a roof over your head it’s absolutely fine. What I don’t get though is the people buying simply because the mortgage payments per month are cheaper than renting! Think of all the savings you can make I hear them say! Penny wise, pound foolish IMHO.

7
As others have said, there is nothing stopping you from taking out a short term mortgage and paying it off.

Whether it is a financially sensible for you to do so is an individual calculation.

A few comments:

How advantageous is the mortgage tax deduction to you, really? For some it is significant - but for us, US citizens in the Steuerparadis, there is no tax advantage at all.

Do your own calculation based on real numbers, consult a tax pro if you wish - then decide whether the mortgage deduction will play in your tax planning long (or short) term.

Be aware that if you put down more than 34% (or is it 35%?), you can generally avoid the 2nd Hypothek, which is usually figured at a higher rate. Calculate in those savings against the opportunity cost of committing funds to a larger down payment; that may or may not change your strategy.

Consider taking the mortgage out in tranches, perhaps a mix of fixed and flexible. That might give you a sense of security, as you can pay off portions as the tranche comes due. Paying a longer term tranche off early is generally not a great idea, as you are contracted to the interest payment for the initial term of the loan. Hence the idea of tranches, giving you some flexibility.

---

We chose to pay off all but a tiny tranche of our mortgage. We keep the small tranche open simply to keep the Schuldbrief open, as a strategy for (eventually) selling the house.

YMMV.

Really - given that one is investing significant money, and taking on even more significant debt, this is one time when consulting the professionals as to your individual situation is money well invested. Start with your bank and your tax and investment advisors - never forgetting, though, in whose interests they are in reality working

8
To some the choice of buying or rental is strictly a economical one, for me it is. I bought because the rent (including taxes) was less than half of the minimum rent I had to pay and even a 3rd of what I had to pay to find something equal, also I bought a house which was just fully renovated so expected costs over the upcoming years where near to zero, and any repair/renovation needed I could do myself. From the money I saved by buying I put half in a savings fond to avoid a disaster due to value loss, when I sold after about 9 years this saved me many thousands compared to renting.

So you might not understand it, others do.

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I don't think 2nd mortgage is even done these days - I put down only the minimum 20% and the entire mortgage is with the same (very low) interest rate.

10
My point is: without adjusting for the risk, the comparison doesn’t make sense.

It’s perfectly possible to adjust for the risk and then compare and decide accordingly.

And I’m sure you of all people have already taken that into account... dear friend

11
I only missed out on an extra price drop due to my house becoming part of recognised earthquake territorium something I could not have foreseen when I bought it.

It is actually impossible to see the full consequences over the years, in my case rents went up a lot over the years while my mortgage stayed the same, on the other hand shortly after I bought the economical market collapsed which later was followed by low interests, and government changed laws on the possibility to rent out my house when not living in it myself. It is also very important how long one wants to live in it. If one is 40 and wants to live in it till the day one dies, a paid off house is to me one of the best pensions possible.

12
In which case your 20% is more than 35% of the value.

Tom

13
Well, interest rate on a mortgage is 1.6% give or take.

That's more than you can currently get from a savings-account - much more.

Of course, you can invest in an ETF or whatever - but those returns are not guaranteed, as is the value of the fund itself.

Wwhile your tax-load increases as interest payments decline, it's AFAIK not prohibitively expensive to do so.

Also, when you're retired, your income will be much less and thus your tax-load.

But if you didn't pay off anything, you'll still pay interest to the bank. The bank doesn't care how much you earn.

So, if you're very conservative, paying off a mortgage actually makes sense.

(IMO): no bets on the stock-market, no bets on continuing ultra-low interest rates. That's the really risk-averse approach.

I wouldn't encourage to put literally every Rappen into paying back the mortgage.

But be advised that banks like to hand out mortgages when you're young, but after retirement, they become very strict and sometimes the bank just says "No" - and then you'll have to sell.

This is usually the case when AHV+BVK is not enough to cover the 5% rule (and no other income).

I do know a guy who took out a Libor mortgage in 2007-ish, from his employer (UBS) at very-close-to-zero % and has kept it ever since. He has paid down about half of it by now, IIRC. But I consider that a once-in-a-lifetime window of opportunity.

While it makes sense to look what other people are doing, you should ask yourself what you are ultimately comfortable with. Because if the though of the mortgage keeps you sleepless at night, what fun is the house?

;-)

14
It all depends on the individual circumstances (e.g: age, career prospects, family plans), risk appetite and market outlook with regards to inflation, GDP growth, wage growth, monetary policy, fiscal policy etc etc

Paying off a mortgage reduces your exposure to increases in interest rates. At these levels of historically low interest rates, if you can secure a sub 2% 10 year from your bank, paying off a mortgage is very doubtful to put it mildly.

What are the alternatives you might ask, well diversifying or hedging. Hedging your own house against price declines is impossible with 1-2-1 correlation (yep I looked into it), diversifying means you are simply gonna sell part of your house to someone else which is also practically impossible so you either sell or take the full risk which is not a very “conservative” approach from a diversification’s point of view.

The main concern is a market correction in housing now that monetary policy is expected to tighten. Further people with the majority of their assets being literally the house they live in have a huge concentration of risk. It’s all fine and dandy while the going is good, until shit hits the proverbial fan and they are forced to sell or move for whatever reason and then they come out crying “We’ve been mis-sold the mortgage”, “we’ve been given bad advice” and the banks would have to be bailed out again. But will the banks be bailed out the next time around?

Get the pop corn folks... this ain’t gonna end well.

15
Buying property in any country is a risky investment, some people make money , some people lose money. Most importantly, the usual rule applies. Buy in a good location, don’t overpay, etc. etc.

I have a property that has appreciated such that my loan is right now less than half the property value (we recently did a valuation). I have a few more years to go on my fixed mortgage and I am paying about 10% of what I would pay if I were to rent. I am lucky, but i did put in a bit of research before buying to be sure that I bought in a good location and the price was comparative to the other properties in the area.

16
I'm risk averse, so I paid off the majority of the loan. If interest rates go up to 5%, the monthly payments are easily affordable, and less than renting a reasonable apartment in/around Basel. The plan is, at retirement, to sell the house and buy something smaller.

I'm putting the money I'm saving on rent/larger mortgage payments into other investments.

17
How would that work - are you saying the bank thinks that every 100K of my purchase price for which I put down 20K and they gave 80K of mortgage money is actually worth 123K so the mortgage amount represents only 65% of the real value?

I'm not sure this is the case - with homegate online mortgage there is no second tranche applied - you simply pick the term and the corresponding rate for the entire mortgage or split it into different tranches by yourself only if you wish. They do calculate the principal repayment so that you'd owe no more than 65% of the purchase value by the age of 65.