How large of a down payment do you need to buy a home in Switzerland?
In Switzerland, financial institutions may only mortgage a property up to a maximum of 80% of the property's market value or purchase price. The so-called lower of cost or market principle applies, meaning you must pay at least 20% of the purchase price in cash, and more if the property is valued higher. Exceptions are rare, typically granted only to exceptionally high-income borrowers. It's crucial to note that additional costs like land registry fees, notary fees, or property transfer taxes may never be financed through the mortgage.
What assets count towards a down payment?
Various liquid assets count towards a down payment, such as savings, proceeds from selling stock or bonds, inheritance advances, or gifts. Funds from the 3rd pillar of the Swiss pension system may also be withdrawn to finance the purchase or renovation of a self-occupied property. Pension funds can be either pledged or withdrawn.
Within the Swiss legal framework about homeownership (Accession à la propriété du logement / Wohneigentumsförderung), it is possible to withdraw up to 10% of the purchase price from your occupational pension fund when financing an owner-occupied property. Similar to the third pillar, pension fund balances can also be pledged or withdrawn. However, withdrawing from your pension fund has far-reaching consequences on your retirement income and should be discussed with an expert.
How to save for a down payment in Switzerland
Increasing 3rd pillar savings (3a)
Accumulating savings on a 3rd pillar account offers several advantages. Retirement accounts generally offer better interest rates than conventional savings accounts; moreover, deposits up to a yearly maximum are deductible from taxable income. The main drawback of the third pillar – that the funds may only be withdrawn upon retirement – is irrelevant in this context, since financing a self-occupied property is one of the few instances where the entire amount can be freely withdrawn.
Investing money
Not only saving money but also investing is a proven strategy for the medium and long-term preservation and growth of wealth. However, high-risk trading on the stock market to save for a down payment is not advisable: if you are looking for maximum returns, you also face high risk and potential losses. The time horizon of your investment plays a central role – most property buyers do not know precisely when they want to take the step into homeownership. If you suddenly find your dream property and need money for the down payment, it may very well be an unfavourable time to sell all your stock.
It is advisable not to purchase too many investments at the same time. The classic fund savings account with a savings plan, where you deposit a small amount into the fund each month, provides good protection against market fluctuations. It is recommended to thoroughly examine your investment strategy together with a specialist
Inheritance Advance
In the case of an inheritance advance (“Erbvorbezug”/”avancement d’hoirie”), an individual, such as a parent, decides during their lifetime to transfer a portion of their wealth to an heir. The inheritance advance is by default subject to equalisation, unless explicitly declared otherwise. What this means that, in the event of inheritance, the advance is considered as part of the estate for the purpose of the inheritance. Thus, depending on the amount of the inheritance advance, it is possible that the beneficiary may suddenly owe money to the other heirs upon the death of their parent or grandparent.
Legally, an inheritance advance is a straightforward matter – it doesn’t even have to be put in writing. An exception exists for the transfer of real estate, which always requires notarisation in Switzerland. Nevertheless, it is safest to document an inheritance advance in writing to prevent potential disputes among heirs in the future. In any case, it should be noted that even in case of an inheritance advance, legal compulsory shares must not be violated.
Inheritance advances are taxed as gifts. However, in almost all cantons, direct descendants and spouses are exempt from gift and inheritance taxes.
Gifts
By Swiss law, a gift is a donation without repayment during one's lifetime, either to heirs or to third parties. In the case of gifts from parents to descendants, gifts are by default considered as inheritance advances unless the heir is explicitly exempted.
Gifts, like inheritance advances, are subject to gift tax. In most cantons, gift tax is waived between spouses and for gifts to direct descendants.
Loans
In contrast to an inheritance advance and a gift, the money in a loan remains in the assets of the lender and is counted towards the lender’s wealth for tax purposes. The borrower may deduct any interest and the debt from their taxable income and wealth, respectively.
Unlike an inheritance advance or a gift, the money in a loan is not permanently transferred and remains recoverable. Written documentation of the loan is crucial, and the loan agreement should include details such as the interest rate, terms, and notice periods.
