In Switzerland the predominant form of property financing is to simply save at full service banks.
The primary providers of property of financing are:
- Cantonal banks
- High-street banks
- Rural banking cooperatives
The mortgage market has a vast range of products that are classified according to the following basic types of mortgage:
- Variable mortgage
- Typology
- The variable mortgage does not have a set term (it may be terminated on a quarterly or half-yearly basis) and the variable interest rate is based on the general level of interest rates
- Reasons for choice: expectation of falling interest rates + possibly own interest in repayment
- Interest rate
- Interest rate adjustment by bank at its own discretion
- Interest rate not determined solely on the basis of the refinancing conditions (repercussion on policy, also due to relevance of interest rate to the level of rent)
- Termination
- Right of termination of the borrower may adversely affect the net yield of the bank if the loan is terminated before the expiry of the anticipated (uncommitted) term
- Repayment option of the customer, provided a repayment obligation has not been agreed
- Typology
- Fixed-rate mortgage
- Typology
- The fixed-rate mortgage involves agreeing a fixed term for the mortgage and a fixed interest rate, e.g. 1 to 10 or even 15 years; the interest rate remains unchanged during the term of the mortgage.
- Launch 1981
- Reasons for choice: expectation of rising interest rates + budget certainty
- Interest rates
- Interest rates are based on the money or capital market rates (refinancing transparency)
- Frequently swap rate as base rate
- Termination
- Limited repayment risk
- Early repayment (e.g. as a result of selling the property)
- only at the market value
- at the currently lower refinancing interest rate the bank has to compensate for the loss of interest (= so-called early repayment charge)
- Typology
- LIBOR mortgage
- Typology
- The LIBOR mortgage is concluded for a fixed term of three to twelve months; the interest rate is based on the LIBOR rate and is adjusted periodically (money market rate + bank margin)
- Hedging options (depending on the bank)
- against falling interest rates
- Minimum interest rate (floor)
- Consequence: cheaper conditions
- against rising interest rates
- Interest rate cap
- Additional costs (premiums)
- against falling interest rates
- Reason for choice: expectation of falling interest rates
- LIBOR mortgage
- Reasons
- Flexible financing
- Based on money market interest rate
- No lock-in periods
- LIBOR-based interest rate [LIBOR = London Interbank Offered Rate]
- Calculation of the interest rate on a LIBOR mortgage: LIBOR interest rate + individual bank margin
- Calculation of the interest rate on a LIBOR mortgage with interest rate hedging: LIBOR interest rate + individual bank margin [e.g. 1,350%] + Premium share for interest rate hedging = interest rate
- Reasons
- Swap mortgage
- Reasons
- Management of extensive credit or investment portfolios [Asset and Liability Management (ALM)]
- Interest rate usually money market based [SWAP = interest rate swap / derivative interest rate instrument]
- Reasons
- Typology
- Combined forms / portfolio mortgage
- Typology
- see above
- Examples
- Mixed mortgage (consisting of a variable and fixed interest tranche)
- Fixed term mortgage with cap (strike)
- Combined LIBOR mortgage and swap (> mortgage with a fixed interest rate)
- Portfolio mortgage (consisting of a fixed-term loan, which comprises several fixed-rate capital tranches which are payable on a quarterly basis and are continually renewed)
- Typology
The collateral security depends on the purpose of the pledge, since there are not yet any hedging options against fluctuations in the value of a mortgage:
- Residential Properties
- Detached houses / condominium ownership (owner-occupied property)
- 1st mortgage (lending limit usually 2/3 of the market value)
- 2nd and additional mortgages (lending limit:
- total lending limit: 80% of the market value)
- 20% of the market value is factored in for interest rates and (commercialisation) costs in the event of commercialisation
- Multiple dwellings (investment property)
- Lending limit: 70% – 80%
- Detached houses / condominium ownership (owner-occupied property)
- Office properties
- Lending limit: 50% – 80% of the market value, depending on the construction date and flexibility of use
- Commercial properties
- Lending limit: 50% of the capitalised earnings value
- Industrial areas and specialist properties
- Individual lending limits
Further Information
- Share of market volume
- approx. 90%
- Description of providers
- Full service bank
- Mortgage bank
- Special-purpose savings institution
- Construction loan
- www.bau-kredit.ch
- Bank financing and risks of a credit squeeze
- Mortgage financing in general
- Residential mortgages
- Viability
- Housing costs should not exceed 25% – 30% of the income of the landowner or debtor
- In past years the banks increasingly focused on the income of the borrower for financing owner-occupied property; there have recently been signs of a revival of equity capital
- Measures on the mortgage market to prevent property prices overheating (sectoral, anti-cyclical capital buffer von 1%)
- Viability
- Financing of management properties