Buying real estate Should you buy a home or not? What you need to know

Real estate can be an attractive investment, depending on market developments. However, hardly anyone decides for or against home ownership solely for financial reasons. Compared to renting, there are several advantages to owning your own home that can make life more pleasant.

Unlike a tenancy agreement, which can be terminated if the owner needs to move back in, there is no risk of being forced to move out. Property owners have greater freedom and are largely free to design their home as they see fit, whether brightly colored walls, flower beds in the garden or a new kitchen. House owners have the most flexibility. If you own an apartment, your project may need to be approved by the housing community.

There is no general answer to whether it is cheaper to rent or buy your own property in Switzerland. This depends on many individual questions, such as the region, the property, your financial means and, last but not least, the timing. General statements on the attractiveness of buying over renting therefore always have only limited significance and are only true at a given moment.

When interest rates were low, the monthly costs of home ownership in almost all parts of Switzerland were lower than those for rental apartments. Since 2022, the reverse has been the case due to higher mortgage interest rates in many regions. Nevertheless, buying real estate can still be a sensible option. If the price of residential property continues to rise and savings only offer low returns, real estate may be a good investment. At the same time, immigration, low vacancy rates and a rising mortgage benchmark interest rate can lead to higher rents, which in turn make home ownership more attractive.

Only a minority in Switzerland today still ask themselves whether to “buy or build,” because building land in central locations has become scarce and expensive. For this reason, buyers usually purchase plots of land with existing and thus older buildings. Unlike new construction, they are then faced with the question of whether they should renovate and refurbish it. Depending on the condition, a new building is often cheaper. It also offers more options, for example, to construct a larger home or install an energy-efficient heating system. The need for renovation should also be taken into account by anyone who inherits a property or who buys one via bidding process or in a foreclosure sale.

If, on the other hand, you own building land, you can realize your dreams without having to think about renovation right away. Even those who choose not to build can still have a say in the interior design, for example, by buying off-plan. And if you remodel yourself, you can still adapt a reasonably priced house or an existing apartment to suit your needs.

Before you start looking for your dream property and ask yourself “Can I afford it?” it’s better to ask yourself “What can I afford?” Having a clear idea of your purchasing power at an early stage will prevent disappointment if you do not meet the equity and financing requirements and your financing fails.

The most common reasons for rejection are an annual income that is too low or insufficient equity. The UBS purchase price calculator will help you work out the maximum you can afford. In simple terms, purchase should be possible if the property does not cost more than five times your annual gross income and you have free equity equivalent to 20% of the property value.

Many buyers need a mortgage to purchase real estate in Switzerland. There are a number of providers including banks, insurance companies, pension funds, etc. All require two conditions to be met for the mortgage: the loan must be affordable. Another decisive factor is the loan-to-value ratio.

As a rule of thumb, to be certain you can afford the property in the long term, your monthly costs should not exceed 33% of your gross income. These costs include the imputed mortgage interest rate of 5%, possible amortization payments, as well as maintenance and ancillary costs, which are calculated at an annual rate of 1% of the property value.

If you want to buy residential property in Switzerland, you’ll usually need to contribute at least 20% of the value of the property as equity. This figure is based on the loan-to-value ratio, which relates to either the purchase price or the market value of the property, whichever is lower.

One or more mortgages can be taken out to cover the remaining 80% of the total. Up to two-thirds of the purchase price can be covered by the first mortgage, which does not have to be amortized. The second mortgage must be amortized within 15 years or before you reach official retirement age.

When buying vacation apartments or investment properties, a higher equity percentage is expected. Equity can include savings, securities, pillar 3 retirement savings, advance inheritances and unmortgaged building land. You can finance 10% of the mortgage by making an early withdrawal from the pension fund (pillar 2).

In the case of a fixed-rate mortgage, the interest rate remains the same over the fixed term. This ensures predictability and is advantageous for you if market interest rates rise during the term.

UBS SARON mortgages have a variable interest rate and run for an unlimited term. This flexible financing option makes sense if interest rates are expected to fall or remain the same and you have a certain amount of financial leeway.

Should I split the mortgage into tranches?

It is advisable to combine different mortgage products and terms. This allows you to benefit from the advantages of both types of mortgage and minimize the risk of having to renew the entire mortgage at once in the event of unfavorable interest rate changes. For example, when the mortgage expires, the general interest rate may be higher than the interest rate you’ve been paying until now.

Mortgage: short- or long-term?

Fixed-rate mortgages usually have terms of between two and ten years. The longer the term, the higher the interest rate in most cases. This is mainly due to the safety margin, i.e., the surcharge for the interest rate guarantee. One drawback of long terms is the lack of flexibility: if you sell the property before the mortgage ends, you may have to pay an expensive early redemption penalty, especially if the mortgage still has a long time to run.

Buying a house or apartment for your own use increases your taxable income by what is known as the imputed rental value. In return, the costs for value-preserving maintenance work (lump sum or actual costs) as well as debt interest and indirect amortization via pillar 3a are tax-deductible. However, with the exception of energy-saving measures, work that improves the condition of a property and thus increases its value is not deductible.

Low mortgage interest rates, i.e., comparatively low deductible costs, tend to lead to a higher tax bill. The reverse is the case when rates are high. Direct amortization reduces mortgage debt and therefore tax-deductible debt interest. This leads to a comparatively higher income tax bill.

Unlike renters, who pay rent and ancillary costs, owners are confronted with a considerable number of different costs. Their costs are therefore more complicated. In addition to consumption-based ancillary costs for electricity, water, sewage and heating, there are mortgage interest, insurance premiums, amortization, fees, possibly higher taxes and expenses for maintenance, which cover minor repairs and upkeep.

Annual ancillary and maintenance costs are usually about 1% of the property value. You will also have to pay renovation costs, which are often underestimated. It is advisable to set aside a reserve if a major renovation is due. With the exception of consumption-related costs, ancillary costs for apartments are often invoiced according to the value ratio agreed by the condominium owners’ association.

The sale of residential property and investment properties is generally easy in Switzerland because the local real estate market works well. More and more real estate in Switzerland, especially in big cities and the surrounding areas, is sold via a bidding process.

From a seller’s perspective, the advantage of this method is that the maximum sales price can be achieved in a reasonable period of time instead of selling at too low a price or not finding a buyer because the asking price was too high. The price achievable when reselling a property depends on many factors, such as its condition and location, as well as how long you are able to wait.

If a property has to be sold in a hurry, you could end up taking a loss. This applies above all to those in peripheral locations, or properties that are very expensive or unusual. Current interest rates also affect the resale price. When interest rates are rising, there is a risk of prices falling. The “Swiss Real Estate Bubble Index” gives you an indication of whether and in which regions real estate may potentially be overvalued.

Owning a house or apartment has very long-term financial implications for you and your family. That’s why it’s better to spend as much time as necessary making realistic calculations and thinking carefully before deciding. What are the tax implications? What’s the right way to finance your purchase? What equity are you willing to put into the property in the long term? The answers to such questions will give you a good basis for your decision – regardless of whether you decide to buy or build a property or to keep renting.