Illusion No. 15: A real estate agent has no idea about financing!

Financing in general
When assessing home financing, Swiss credit institutions check the customer’s creditworthiness and the quality of the property. The financing structure and affordability analysis play an important role.

The loan against residential property is normally 80% (risk) capital. Therefore, a homeowner must normally contribute at least 20% of the purchase price in the form of equity or deposit it as security. This can be available to the homeowner in the form of savings capital, securities, entitlements or pension fund assets, among other things. In the case of very high incomes, the equity can be mortgaged instead of being offset against the purchase price. In such a constellation, the mortgages can easily reach 90-100% of the purchase price.

However, a classic financing structure is usually used, whereby the financing institution hypothecates 80% of the purchase price, usually divided into a first mortgage (65%) and a second mortgage (15%). The homeowner contributes the remaining 20% of the purchase price with their own equity. Unlike in other European countries, mortgages in Switzerland do not have to be repaid in full. Normally, the second mortgage is repaid by means of direct or indirect amortization until retirement age, but in 20 to 25 years at the latest. In contrast, the 1st mortgage often remains in place beyond retirement age.

Affordability also plays an important role, both at the start of financing and at retirement age. The affordability calculation measures the level of housing costs (mortgage interest, amortization and ancillary maintenance costs) in relation to income. Depending on the financing provider, a maximum limit of around one third of gross or net income is set. Some institutions set the limit at 28% of net income, while others finance home ownership at housing costs of up to 33% of gross income. This different assessment of affordability can be equivalent to an income difference of around 10%.

Luxury and collector’s properties (from CHF 2.0 million)
Financing luxury properties differs considerably from traditional financing. It is worth taking a closer look at the special guidelines and lending principles of credit institutions (banks and insurance companies):

What is exclusive real estate?

The assessment criteria vary depending on the credit institution. In general, the following property characteristics speak in favor of the assessment as a luxury property:

• Expensive extensions such as swimming pools or bathing areas
• Elaborate, above-average architecture
• Spacious, inviting floor plan (living space for apartments from 250 m2, for houses from 300 m2)
• Special, expensive materials (which can result in a high m3 price during construction)
• Lots of surrounding land, very elaborately designed and well-kept garden
• First-class panoramic location, elegant residential area
• Low-tax municipality with high social prestige
• Lake or river bank access
• Market value over CHF 1.5 million (apartments) and CHF 2.0 million (houses)

It goes without saying that the property location is the most important criterion when assessing an exclusive property. In locations with expensive land prices (e.g. Geneva-Coligny, Lausanne-Ouchy, Meggen, Zürichberg, Zurich Gold Coast, March region in the canton of Schwyz, Zug, Gstaad or St. Moritz), construction is often more elaborate and more expensive. The total price (land costs and construction costs) is certainly decisive, but varies greatly depending on the region.

The “Liebhaberobjekte“
Some credit institutions have created an additional category, the “Liebhaberobjekte”, which are financed according to special principles. A collector’s property is a special residential property that is unusual and may have the following characteristics:

• Property that previously had a different use (farmhouse converted into a residential building, industrial building converted into residential lofts)
• Buildings with historical value and/or listed buildings
• Property that is difficult to sell (e.g. on an agricultural plot)
• Striking disproportion between land and property value
• Very expensive and exclusive property in a location with rather inexpensive residential buildings (low marketability)
• Improvements that are very individual and do not automatically mean value for the new owner (e.g. own home cinema, entire house wired with hi-fi system, large bathing area with oversized swimming pool, more than 4 garage spaces for a detached house)

The market values of collector’s items are often not calculable. For example, a costly renovation of a farmhouse often costs much more than a new build. For the lending institution, the market value assessment is often a matter of judgment, as traditional market value assessments (e.g. using comparative value or hedonic models) do not produce correct results.

What factors are different in the financing of luxury or collector’s items compared to traditional financing?

The following explanations show the differences:

The changed financing structure:
Luxury and collector’s properties are less highly mortgaged. The owner must contribute at least 35 % to 40 % of the mortgage value in the form of equity to the financing. The first mortgage only covers around 50 % of the property value, the second mortgage often only another 10-15 %. In most cases, the 2nd mortgage must be amortized by the time you retire, and in many cases even part of the 1st mortgage. This reduces the proportion of debt financing to 50% of the property value or even lower.

The changed affordability calculation:
Owners of exclusive properties often have high incomes and sufficient equity. The high mortgage value is often due to tax considerations. In addition, the unused cash can be invested in assets or used in a company. The affordability calculation can also show more than 33% of the gross salary if the income and asset situation is good. Depending on the income situation, it is not uncommon for housing costs to account for 35-40% of total income when financing luxury properties.

The changed banking relationships
Financing is often assessed by banks taking into account the entire customer relationship. Other business areas that the customer maintains with the bank (e.g. investments, insurance, business relationships) are taken into consideration. In the case of financing, the customer must assume that he will be assessed by the credit institution as a whole and that “counter-transactions” are required for good, favorable conditions.

The changed interest rate conditions
Owners of luxury properties are usually rated as AAA customers and enjoy good credit conditions thanks to their creditworthiness and the often high mortgage amount. Depending on the situation (loan-to-value ratio, income situation, other customer relationships), a customer margin of 0.6 % to 0.8 % on the respective refinancing rate (money or capital market rates) can be expected. Normally, customer margins for traditional financing are around 1.0 % to 1.3 %, which is significantly higher.

In summary, it can be stated that the financing of luxury properties and collector’s items should be viewed in a very differentiated manner.

Finally, a few tips for successfully financing luxury or collector’s items:

• Ask your bank whether your property is subject to normal financing or whether it is classed as a luxury or collector’s item. By requiring at least 80% borrowed capital without further collateral, you can find out how the bank will assess your property.
• Compare the different conditions and credit criteria. Some credit institutions are not interested in financing luxury or collector’s items and offer unattractive conditions.
• Seek independent advice. There are professional mortgage and credit advisors who, for a fee, will find the best financing for you with the best interest conditions. You save time and often get back the fee you pay several times over in the form of favorable interest conditions. The savings potential is considerable, especially for luxury properties.
• Attach importance to the overall relationship with the bank. However, avoid golden shackles and take care not to sell yourself to the lender with “skin and hair”.

PDF Illusion No. 15

Author: Claude Ginesta

Claude A. Ginesta is a Swiss certified real estate trustee and CEO / owner of Ginesta Immobilien AG.
The company was founded in 1944 and specializes in the sale of real estate in the economic region of Zurich and Graubünden. With branches in Küsnacht, Horgen and Chur, the company acts as an estate agent throughout Switzerland for properties with a supra-regional character.

Publisher of the Illusions series Ginesta Immobilien AG, www.ginesta.ch