The ABCs of financing: everything you need to know about financing your own home

For many people, buying their own home is a dream come true. Yet this step in their lives is also full of financial challenges and uncertainties. In this article, you will learn how to ensure the affordability of your mortgage, plan renovations effectively and take tax aspects into account. Follow our tips to make your path to home ownership as smooth as possible.

Purchasing a home of your own is a significant investment. For many people, it is even the most important investment in their lives. Up to 80% of the property value can be financed with mortgages. The first mortgage covers up to two thirds of the property value and does not have to be amortized. The remainder is covered by a second mortgage, which must be amortized within a maximum of 15 years.

You must provide equity for the other 20%. However, parts of this amount can come from pillar 2 and 3a pension assets.

A property represents a long-term investment and therefore requires a mortgage that is affordable in the long term. To ensure that this remains the case, even if interest rates rise, an imputed interest rate of 5% per year is taken for the affordability calculation. This is well above the current level (as at May 2024).

The affordability calculation also includes amortization and assumes that maintenance and ancillary costs will correspond to 1% of the property value. The imputed costs of the property should not exceed 33% of your gross income overall.

The price of a property depends on supply and demand. The real estate market can go through long phases of rising or falling prices, which vary according to the economic cycle and interest rate trends. That’s why it’s worth monitoring the market closely and making sure you are familiar with the specific characteristics of the location.

All properties suffer age-related depreciation to a certain extent: materials and components are exposed to the effects of the weather and need to be repaired or replaced over time.

Regular building maintenance and a well-thought-out renovation strategy are important for long-term value retention. You should also bear in mind that certain equipment features, components or colors may no longer meet the latest requirements in a few years’ time. What is more, the requirements for thermal insulation and energy efficiency have increased a great deal in recent years.

We recommend choosing a mix of different terms and products to make it easier to spread possible risks such as the interest rate risk associated with mortgages. By staggering the terms, you will avoid having to rethink your entire financing solution in an unfavorable interest rate environment.

With fixed-rate mortgages, you can also lock in a fixed interest rate for a term of 2 to 10 years. This protects you against rising interest rates, but it also prevents you from benefiting from falling interest rates.

Taxes and fees are incurred when purchasing residential property. In addition, increases in value, renovations, inheritance, gifts and sales may have an impact on your taxes – it makes sense to check the tax consequences at an early stage, especially as taxes vary greatly from canton to canton.

If you live in your own home, the imputed rental value is subject to income tax, for example. This value is at least 60% of the normal market rent. In return, mortgage interest and value-preserving investments can be deducted from your taxable income. Whatever your situation, careful financial and tax planning is always recommended.

It is essential for homeowners to ensure the financial security and protection of their family, especially in the face of unforeseen events such as accidents, incapacity to work, disability or death – above all if the family income is mainly generated by one person.

A large financial gap can arise if you find yourself unable to work due to illness, even if you have taken out insurance against the consequences of an accident. Illness or death can jeopardize the affordability of a mortgage. In the worst-case scenario, you could be forced to sell your home.

It can therefore make sense to at least partially insure yourself against risks such as death or disability by taking out a risk policy, for example on your second mortgage. UBS offers customized solutions in cooperation with the Zurich Insurance Group. Your client advisor will be happy to provide you with information about the various insurance solutions available.