Mortgage glossary & FAQ
A comprehensive guide to mortgage terminology
Do you have questions you would like to ask about mortgages? Or do you need help understanding some of the related terminology?
As a strong partner with the necessary expertise, we are here to assist you.
Find out more about real estate borrowing.
Amortisation means paying back the amount of the mortgage in stages. This is also known as repayment.
There are two methods:
With direct amortisation, the amount of the mortgage is reduced with each repayment, meaning that the amount of interest payable goes down as well.
Instead of repaying your mortgage directly, you invest in a private savings account (pillar 3a or insurance).
To qualify for a mortgage, you need equity of at least 20%, whereby 10% must be real cash. A pension fund balance is not classed as real cash.
Examples of real cash:
- Savings balance from the 3rd pillar
- Advances against inheritance
Most first-time borrowers choose a fixed-rate mortgage because this offers the greatest level of certainty. Borrowers can protect themselves from rising interest rates because the rate payable remains the same. However, these mortgages have a higher interest rate right from the start than variable mortgages. The term can be up to 15 years. Thanks to the fixed rate, you can budget for your housing costs exactly, so you know your financial obligations for the next few years.
Our tip: Before you take out a fixed-rate mortgage, check the early repayment arrangements, especially if you are looking at deals with long terms.
Agreement in principlekeyboard_arrow_down
This is an informal agreement by a bank which states that it would be willing to provide finance for a specific property or investment venture. It may be binding or conditional.
People often wrongly think of a mortgage as a ‘loan on a property’. In fact, it is defined as the title to the property.
LIBOR mortgage - NB: LIBOR is being replaced by SARON at the end of 2021keyboard_arrow_down
The LIBOR mortgage (London Interbank Offered Rate), which is based on the British base rate, will be discontinued on 31/12/2021. On the Swiss market, the SARON mortgage calculated based on the SARON (Swiss Average Rate Overnight) has been introduced to replace the LIBOR mortgage.
With a SARON mortgage, you can benefit from current interest rates. With fixed but shorter terms, it offers a variable interest rate which is usually lower than the rates for fixed mortgages. This mortgage is based on the reference rate which Swiss banks use to lend money and charge interest to one another.
It allows you to benefit from transparent, current money-market rates. However, these change every three months. This means you have to be willing to take more of a risk and you should expect interest rates to rise in the next one to three years.
Securing finance for your dream home is not a matter of a chance. The interest, capital repayment, maintenance costs and bills must not exceed 33% of your remaining gross income. We will work out what amount you can borrow.
Another option is a variable-rate mortgage with a non-fixed term which can be cancelled relatively quickly – normally within six months. This offers flexibility for other forms of finance. The lender constantly adjusts the interest rate to current market conditions, which gives the borrower less certainty. However, this option allows you to benefit from decreasing interest rates.
What types of mortgage are there in Switzerland?keyboard_arrow_down
In Switzerland, there are three types of mortgage: fixed-rate mortgages, variable-rate mortgages and SARON mortgages (money-market mortgages). In addition, special construction loans are available for new builds. For all mortgages, the interest rate depends on the amount of the loan and its term, market interest rates and your credit rating (creditworthiness).
Which mortgage model is right for me?keyboard_arrow_down
There are different mortgage models. Which is the right one for you? Your financial resources play a role, as do your attitude to risk and anticipated developments in interest rates. In Switzerland, there are three types of mortgage: fixed-rate mortgages, variable-rate mortgages and SARON mortgages (money-market mortgages). For all mortgages, the interest rate depends on the amount of the loan and its term, market interest rates and your credit rating (creditworthiness).
Which property can I afford?keyboard_arrow_down
The calculated interest and incidental costs plus any repayments, maintenance/alimony payments, personal loans and leasing costs may not exceed 33% of your remaining gross income. In some cases, banks may consider lending more than 33%.
When is the right time to ask ImmoSky about finance?keyboard_arrow_down
- If you want to know your budget before you start looking for a property
- If you already have a specific property in mind
- If you want to seek a second opinion or offer from a lender other than our usual bank
What is a second mortgage?keyboard_arrow_down
If your capital is less than 35% of the property’s current market value, the difference is known as a ‘second mortgage’. The second mortgage represents the amount which has to be repaid within 10 to 15 years. Amortisation can be direct or indirect.
How much equity do I need to get a mortgage?keyboard_arrow_down
You need equity of at least 20%, whereby 10% must be real cash. Examples include savings, a savings balance from the 3rd pillar or advances against inheritance. A pension fund balance, for instance, is not classed as real cash.
What is the difference between direct and indirect amortisation?keyboard_arrow_down
Amortisation may be direct or indirect.
- With direct amortisation, the amount of capital is steadily reduced, meaning the amount of interest payable is reduced each year.
- With indirect amortisation, borrowers pay into a pillar 3a savings account or insurance policy during the calendar year. The amount of the mortgage remains the same throughout the term. The balance in the savings account grows and payments made into this can be declared on the borrower’s tax return up to the maximum annual amount.
What documents do I need to enquire about financing?keyboard_arrow_down
To check an enquiry about financing, banks need documents relating to the property in question and your current financial situation. Any missing paperwork will delay the process, so please have the following documents to hand:
You are welcome to contact us if you do not yet have all these documents and we will help you to obtain them.
What is needed for a potential lender to give me an agreement in principle?keyboard_arrow_down
Before the potential lender – usually a bank – issues a written agreement in principle, they will conduct a credit check on you and collect information about the property. Above all, they will check:
- Financing requirements
- Information and documents relating to the property (land register entry, particulars, etc.)
- Evidence of available equity
- Information about financial status
- Evidence of income
Is it riskier without an agreement in principle?keyboard_arrow_down
Without an agreement in principle, there are considerable disadvantages for buyers and sellers alike. This means the risk is greater on both sides.
Is an agreement in principle a firm commitment to provide funds?keyboard_arrow_down
No. As mentioned above, an agreement in principle is informal and not usually binding. It should not be confused with a loan agreement. The loan agreement alone is legally binding. This contains all the details of the agreement between the borrower and the lender.
What happens in the case of a divorce partway through a mortgage term?keyboard_arrow_down
There are various scenarios and no ‘one size fits all’ solution. The crucial consideration is the former spouses’ personal situation and the outcome of their divorce agreement or ruling.
It is always advisable to discuss all the scenarios before contacting the lender. Crucial questions include:
- What funds did each spouse contribute and in which form?
- Who meets the affordability criteria for this property?
Legal clarification is needed regarding the following types of contribution and possible repayments:
- Advance withdrawals from the 2nd or 3rd pillar
- Advances against inheritance
- Interest-free loans
To recalculate affordability, alimony and maintenance payments are added to or deducted from each party’s gross earnings. If the property is sold, it is important to ensure that capital gains tax is calculated correctly, especially if one of the parties purchases a new property.
As a rule, provided the mortgage interest and any repayments are paid on time, the mortgage can be retained with joint and several liability in the case of a divorce. This also applies to renewals when a mortgage deal ends. Affordability criteria must always be met whenever the bank or other lender completes an assessment.
When should a mortgage be renewed?keyboard_arrow_down
It is worth thinking about the type of mortgage ahead of time and keeping an eye on current interest rates and trends. Sometimes, it is also financially attractive to switch to a different provider.
If you remain with the same provider:
- Start looking into a new mortgage 6 months before the deal ends
- Consider any additional charges that are payable if you switch early
If you want to change provider:
- You have the best chances of switching provider if you only have one mortgage or if all the mortgages on the property end at the same time.
- Allow plenty of time because the new lender will need to check all the documents.
Is money borrowed on a mortgage reserved for a certain purpose?keyboard_arrow_down
A mortgage is a loan which is linked directly with the property.
Depending on the lender’s rules, it may be possible to take out a mortgage for a different purpose or increase the amount borrowed.
As a rule of thumb:
Provided affordability criteria are met, up to 65% of the current market value may be borrowed. A portion of this may be used for a different purpose.
This amount may be used for any purpose (e.g. to buy a second property or invest).
By contrast, if you increase your borrowing for a specific purpose, these funds may only be used in connection with the property (renovation, buying out a former spouse on divorce, extraordinary payment required by the owners’ association, etc.). The amount of additional borrowing which is approved will depend on the recalculated value of the property following its renovation and the ultimate affordability analysis.
Our tip for buyers
Don’t wait until you have found your dream property before thinking about finance. You can have a credit check done, for example, even without a specific property in mind. The advantage of this is that an agreement in principle can be issued much faster and you know before you even start looking what level of financing you can comfortably secure.
No-obligation advice from our financing experts
Would you like to find out more about possible financing strategies, with no strings attached? Our financing experts provide independent advice, even if you are not buying a property with ImmoSky.
Please contact us for more information or to arrange an appointment.