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Joint and several liability for mortgages
Pointers for cohabiting couples taking out a mortgage and buying property
Important information on joint and several liability for mortgages. What unmarried couples should bear in mind when purchasing real estate.
Content:
Content:
- If two people take out a mortgage together, both are generally jointly and severally liable for the full amount.
- A cohabitation agreement is recommended for unmarried couples. This document gives details of aspects such as the ownership situation and sharing of costs.
- For cohabiting couples, it is important to consider risks such as disability and death, and to take out appropriate insurance.
- To the conclusion
If couples purchase residential property in Switzerland and take out a mortgage together, they are generally jointly and severally liable to the mortgage lender for the mortgage debt. However, unlike for married couples, many legal issues are not clearly settled in advance for cohabiting couples. This results in specific risks that need to be taken into account by the parties involved.
The term “joint and several liability” refers to a special form of joint liability. In the context of mortgages, “joint and several liability” refers to the liability of two or more debtors for the entire amount borrowed.
As the creditor, the mortgage lender may demand repayment of the mortgage from all joint and several debtors. Being a joint and several debtor therefore means that each person is individually liable for the repayment of the entire debt. The creditors may, at their discretion, claim only a part or the whole amount from all joint and several debtors. All debtors remain liable until the entire debt has been repaid. If one joint and several debtor pays more than their individual share, they may be able to claim repayment from the co-debtor(s).
Joint and several debtors can come to an agreement between themselves as to how much they want to contribute to the repayment. However, this type of agreement is only effective between the joint and several debtors and not vis-à-vis the creditors, unless otherwise agreed with the creditors, which is not usually the case.
This means that even if the joint and several debtors agree among themselves that one person will pay a larger contribution than the other(s), the creditors still have the right to claim the full amount from each individual. Even in the event of the death or insolvency of one debtor, the other debtors still remain liable for the entire debt.
Purchasing real estate as a couple
Purchasing real estate as a couple
For many couples, the income and assets of one partner alone are not sufficient to meet the affordability requirements of mortgage lenders.
Before agreeing to grant a mortgage, credit institutions check the financial situation of the potential borrowers. The cost calculation is generally based on a calculated interest rate of 5%, and includes maintenance and ancillary costs, which account for around 1% of the property value. In addition, couples usually have to contribute at least 20% of the purchase value from their own funds to finance residential property.
The monthly costs for the chosen property, including mortgage interest and repayments, should not exceed around a third of the couple’s gross income. It is easier to meet these requirements and provide the necessary equity as a couple than alone. Buying a home together and taking out a joint mortgage is therefore very common among couples.
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Debtor status of unmarried couples: evening out financial differences
Debtor status of unmarried couples: evening out financial differences
If one person’s financial resources are sufficient, a mortgage lender will generally accept sole liability. If the affordability conditions are not met by taking into account the means of just one partner, the mortgage lender will require joint and several liability before issuing a mortgage. This can also be requested by the couple themselves, and agreed to by the mortgage lender, irrespective of the financial situation.
In principle, joint and several liability does not take into account the distribution of ownership within the partnership. That is why providing different proportions of equity can be problematic. If one partner only contributes 20% of the funds but is liable for 50% of the debt, this can lead to disputes.
Unlike for married couples, there are very few legal provisions applicable to cohabiting couples that automatically come into effect in the event of a separation, for example. There are also fewer requirements for unmarried couples in terms of inheritance law and social insurance.
It is therefore up to the cohabiting partners to make legally binding agreements with each other, for example in the form of a cohabitation agreement. It is best to seek professional advice.
Defining rights and obligations in a cohabitation agreement
Defining rights and obligations in a cohabitation agreement
It’s a good idea to draw up a cohabitation agreement before purchasing a property together. In particular, this agreement should contain clauses on ownership, costs and what will happen in the event of separation.
- The precise description of the division of ownership includes details of the form of ownership (sole ownership, co-ownership or joint ownership), the shares and voting rights of both partners, and the origin of the capital contributed.
- It determines how current expenses, in particular for interest, ancillary costs, maintenance and renovations should be broken down: equally, according to income or otherwise?
- If the couple separates, it is specified in advance who will take over or continue to live in the property, and under what conditions.
A cohabitation agreement can also apply to other issues concerning the relationship and the couple’s finances. Some people use it to set certain conditions for sharing the costs of the joint household, for example for food, energy and other expenses. The agreement can also specify how assets acquired or inherited during the relationship should be handled in the event of separation or in certain other circumstances.
It is advisable to keep reviewing the provisions and, if necessary, to adapt them in line with the current situation.
How cohabiting couples can recognize risks and protect each other
How cohabiting couples can recognize risks and protect each other
Cohabiting couples are less protected against unforeseen events than married couples or registered partners. This is why unmarried partners should protect each other, especially if they are buying a home together.
Obtain expert advice on how to close gaps in your pension provision, for example due to an accident, disability or death:
- Death: Cohabiting partners are not each other’s legal heirs. It is therefore advisable to draw up a will or an inheritance contract in addition to the cohabitation agreement in order to determine the beneficiaries. Among other things, it can be stipulated that the legal heirs are entitled to the compulsory portion of the inheritance. In order for this to be valid, there are certain requirements that must be strictly observed, particularly in terms of formalities.
- Cohabiting couples should also consider the risk of the partner’s death. A death risk insurance policy can provide cover. The insurance amount paid out can help the surviving partner to continue to support the property financially. Under certain circumstances, the insurance amount received can also be put towards the mortgage, although any costs (such as a prepayment penalty) must be taken into account.
- Incapacity to work: If one of the partners becomes unable to work, the affected household is often poorly insured, especially if the incapacity to work is caused by illness. The resulting pension gap can be closed with a disability pension, for example.
- Incapacity of judgment: An advance care directive can make it easier for one partner to represent the other if they become incapable of making their own judgments. Each partner should issue an advance care directive.
It is important to seek advice if you are unsure about anything. You should regularly review any agreements and written declarations and update them if necessary.
How can I best protect my family?
How can I best protect my family?
- With Zurich Immo-Protect, you can insure against the financial risks of death or incapacity to work.
- You decide what risk you want to insure against and choose the amount of the lump-sum payment.
- Our experts explain what really matters when it comes to protecting your family and partner.
“Marriage for all”
Since 1 July 2022, same-sex couples can marry or convert their registered partnership into a marriage. Since this date, couples can no longer enter into new registered partnerships. However, it is possible to continue a partnership that was already registered.
Pillar 3
Pillar 3
If one member of the couple dies, the availability of their pension assets for their surviving dependents is different for pillars 2 and 3.
Under the occupational pension scheme (pillar 2), some pension funds recognize an entitlement to survivors’ benefits for cohabiting couples, taking into account factors such as the duration of the cohabitation or whether maintenance payments were made for joint children. However, this is not always the case. Check with your pension fund whether and under what conditions benefits would be paid to unmarried surviving dependents.
A cohabiting couple can fill gaps in pillars 1 and 2 with solutions such as private retirement savings. This can be done via pillar 3, either in the form of restricted retirement savings in pillar 3a or unrestricted retirement savings in pillar 3b.
The beneficiaries of restricted pension plans are defined by law, whereby the insured persons have a certain degree of freedom of choice. The cohabiting partner can even be given preference over descendants.
In principle, you are free to choose the beneficiary of your unrestricted pension plan (pillar 3b). Pillar 3b includes endowment life insurance policies, for instance.
With both pillars 2 and 3, it is important to notify the pension fund in writing of any changes to the order of beneficiaries.
Again, it is essential for unmarried couples to take their own measures to ensure that they are well protected, after obtaining detailed information and advice.
Benefits and drawbacks of joint and several liability for unmarried couples purchasing real estate
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Important points to be clarified
Important points to be clarified
- Property: Think about which form of ownership suits you best. If you opt for co-ownership, define who holds what proportion of the property. It is also advisable to make decisions on the following points and to record them in writing: Who can contribute how much equity? Who will contribute how much to the running costs? What are the tax consequences, taking into account the fact that mortgage interest can regularly be deducted from income?
- Cost contributions: Document who contributes what share of the investment and maintenance costs. Keep the receipts for the long term. It is easier to work out later who contributed how much based on a list of payments.
- Contract: A written contract is always recommended. It can prevent conflicts about cost contributions and property ownership in the relationship, for example. It will also come in useful if the couple separates.
- Pension planning analysis: According to the law, cohabiting couples – unlike married couples and couples in a registered partnership – often do not benefit from accident insurance, AHV and pension funds, or benefit only under certain conditions. What measures make sense to ensure protection in the event of the partner’s death?
Couples buying a property in Switzerland should plan carefully, communicate openly with each other, and ideally should also take legal advice into consideration. Unlike married couples and registered partners, cohabiting couples are mainly left to their own devices when it comes to agreeing on legally binding mutual rights and obligations and taking precautions against risks. Decisions about taking out a mortgage will be easier if the situation has been clearly defined beforehand.
Disclaimer
Disclaimer
