I have been checking the properties online in the past years but did not take action. Until recent few months, looking at the strong growth in the market and having interviewed so many real estate investment gurus, I realized that it was time for me to get into the market. There are options for each person, no matter what situation you are in.

Since Switzerland has strict rules against property speculation, you need to understand how it works to find the best solution and optimize your cash flow and profit.

Let’s first understand what the rules and regulations are.

1.  Down payment

If you buy an apartment for a house to live there yourself, the minimum down payment is 20% of the property value. The property value is not your purchase price but the value your bank or lending party assigns. They use valuation software to determine the market of the property. So there are two scenarios:

Your purchase value > the bank’s valuation

In this case, the bank will use its valuation to calculate the 20% down payment amount if you can get the maximum loan – the rest 80%. This is often the case when people search for properties in the high-demand region, such as Zug. The difference between the purchase price and the bank’s valuation must be filled by cash. So you have to pay more than 20% of the purchase value in cash.

For example, your purchase price is CHF1,200,000. The valuation from the bank is CHF1,000,000. If your income level meets the criteria to allow you receive a CHF800,000 loan. You will pay CHF200,000 down payment (20% of CHF1,000,000) plus the CHF200,000 (CHF1,200,000-CHF1,000,000), total CHF400,000 cash.

Your effective down payment is 33.3%.

Your purchase value =< the bank’s valuation

In this case, if your purchase price is CHF1,000,000. The bank valuation is CHF1,000,000. And your income level meets the criteria to allow you receive a CHF800,000 loan. Your down payment is 20% – CHF200,000.

In short, take the purchase price for granted. Your bank might not give you the loan amount you hoped for. You can use online platforms such as Houzy, to evaluate the property’s value, or you can send the property’s information to the bank; they will let you know if the price is accepted.

If you buy a holiday home or an investment property, the required minimum down payment is 25%. Usually, people pay much more because the mortgage calculation for self-use and investment property is different. And you have to pay back the amortization within ten years instead of 15 years for the self-use property.

2. Loan amount

The loan amount depends on your household income or the rental yield of the investment property. Let’s see it case by case.

Mortgage for your own home

Banks and all lending institutions use a distress test to calculate the maximum mortgage amount that you can receive. Some use 4.5%, some use 5% as the mortgage interest rate.

 The total monthly cost should not exceed 35% of your monthly income. Some banks use net income, and some use gross income.

 Total monthly costs include:

•  interest payment: 4.5%-5% interest rate

•  utilities: 0.5%- 1% of total price (Nebenkosten)

•  amortization: 1% per year for 15 years

You can use some banks’ banks’ online platforms to quickly calculate the maximum loan or minimum salary, such as this one from ZKB.

Mortgage for investment property

The same method is used to calculate your affordability; the bank will use your rental income instead of using your salary income. The investment property has to be able to support itself. As you might have guessed, the rental yield is hardly at 4% in Switzerland, and then there is a gap.

They will calculate the yearly payment using a 4.5% or 5% interest rate for your CHF1,000,000 investment property, 25% down payment. Imagine the annual payment is CHF52,000. But the yearly rental income is only CHF25,000. There is a gap of CHF27,000. Then the bank will take your salary into the calculation to fill the gap. So the salary amount to be used for the mortgage will be CHF27,000 / 0.35 = CHF77,143.

However, I know there are cases that if you have a long-term relationship with a bank, have significant investment, or/and have substantial cash flow constantly going into the bank account, you can get mortgages to buy multiple investment properties with only a 20% down payment. The financing of investment property varies by bank, and I suggest that you talk to a few banks or mortgage brokers to understand who is more investor-friendly in this matter.

3. Tax

Tax is a fascinating topic. Wherever you go in the world, people like to talk about taxes. In Switzerland, where your property is, where you live and when you sell your property impact your taxes.

Income tax

First, where you live (your new home) might have a different tax than where you live now. Your income tax rate is determined by the federal tax rate, canton tax rate, and your village(city) tax rate. Canton Zug has a lower tax rate than canton Zürich, and Zollikon has a lower tax rate than Zürich city. Therefore low tax regions tend to have high property prices. Only when you earn a very high income is it not worth paying a premium to buy a small and old apartment in a low-tax region. At the same price, you can buy a nice home for yourself to live in another region with a slightly higher tax. Even if your income increases drastically over the years, you can always move to a low-tax region, given all other factors are the same.

Capital gain tax from selling (Grundstückgewinnesteuer)

If you want to sell your property at a higher price after a few years, you will make a profit. This profit is taxed at a rate according to how long you have had the property. Each canton has its tax table. For example, in canton Aargau, If you sell the property for less than one year, the tax rate is 40%. After five years, if you sell the property, the tax rate is 32%. The longer you hold the property, the lower the tax rate.

What does it mean to you? First, buy something that you think you can live for quite some years, or at least you can turn it into a rental property later after you purchase another home. Buy, and flip is not so profitable if that is your strategy as an individual investor.

However, there is a way to delay this tax when you sell your property. You can use the profit to purchase another home within two years after selling your first one. Then this tax withheld by the tax authority will be returned to you, and you can keep rolling this tax into your new home

This tax regime essentially reduces house flipping activities and keeps the swiss real estate market stable.

Conclusion

Whether you are buying for self-use or investment, you need to understand those three critical points before you start searching for properties to buy. If you purchase something overvalued, even if you have the 20% down payment, the bank won’t give you the loan to cover the rest. If you buy something reasonably valued, but you cannot ”afford” it using the stress test, you will still not be able to get a loan from the bank. Lastly, if you plan to buy something that you won’t live for long and will sell later, be aware of the high tax, you have to pay, or you can roll it into the next apartment within the given grace period.

In the following article, I will teach you how to find the best mortgage rate for your property and save you tens and thousands for the future.