When should I hire a lawyer for home financing?

Real estate is expensive – depending on the location, size, and condition of the property, large sums of money are required for the purchase. Whether a person can afford it depends on their personal situation and their savings. Most people with an average income have to save for a long time to pay off a house right away.

For many, however, owning their own home or apartment is a more attractive alternative to renting for years. Instead of saving for many years and investing money in rent during that time, many prefer to take out a loan. They prefer to invest in a home early and pay off the purchase price over the years. This requires support from third parties. If the family doesn’t have the money, banks or insurance companies can help with loans.

The most important thing is to realistically calculate your budget for buying a home. Purchasing a property that is far beyond your budget is a very risky or even impossible undertaking, even with excellent financing options. Don’t forget not only the purchase price, but also taxes, living expenses, and maintenance costs. If you take out a loan or other type of credit, interest will also be charged. You can consider the following options when considering financing your future home:

Private loan: A private loan can come from family members or friends; it is often granted at very low or even interest-free rates. Even with private loans, a loan agreement should be drawn up to clarify the general terms and conditions and protect both parties. The loan may need to be registered as a mortgage in the land register.

Pre-inheritance or gift: Another option is to receive your inheritance early. If there are multiple heirs, the testators should consider the obligation to make equal payments – otherwise, problems and disputes may arise later on. Aspects such as the obligation to support relatives and any inheritance or gift taxes that may apply should also be taken into account.

Loan or mortgage: Banks or insurance companies issue loans or mortgages to finance a home. The applicant (the future borrower) undergoes a thorough background check – only if the necessary collateral is provided is a loan approved.

The typical approach involves a certain percentage of equity and the remaining part of the purchase price from a loan. At least 20% of the purchase price must be equity at the time of purchase.

Equity or equity refers to money available to the applicant. Of course, this isn’t just cash that the applicant has lying around in a safe. The following also count as equity:

• Money in a regular or savings account
• Pillar 2 retirement savings (occupational pension plan, e.g., a pension fund) that can be liquidated
• Sold securities
• Loans from family members or acquaintances
• Inheritance advances or other gifts

At least half of the 20% equity must be paid with these liquid assets. The other half can also come from the 3rd pillar, such as a private pension plan.

Those who cannot afford the entire purchase price in equity – in reality, this is the majority of homebuyers – take out a loan. The most common are mortgages, which can be issued by banks, insurance companies, or other institutions. The following types of mortgages are typical for home financing:

• Fixed-rate mortgages: These mortgages are so popular for home financing because they often have long terms. The interest rate is fixed and is set for the entire term when the loan is issued.
• Variable-rate mortgages: These usually have neither the term nor the interest rate. The latter is variable and adjusts to the market.
• Money market mortgages: These often have a fixed, shorter term but a variable interest rate. The interest rate is based on the SARON (Swiss Average Overnight Rate) and thus on current market interest rates.

A mortgage is a loan, usually long-term. The property purchased with it serves as collateral and thus as security for the lender. Interest is also charged for lending the money. It is common for the first mortgage to be for up to 65% of the purchase price. If this is not sufficient, a second mortgage can be issued for 15% more (up to a total of 80%). However, this second mortgage often has a higher interest rate.

Lenders naturally want to protect themselves and reduce the risk of non-repayment. For this reason, borrowers are thoroughly assessed for affordability before approving a loan. This involves comparing the future ongoing costs with the individual’s income. Most lenders require a maximum burden of 35% of net income.

Ongoing costs are not limited to mortgage repayment and interest. Among other things, the following factors are taken into account:

• Mortgage amortization
• Mortgage interest
• Maintenance and utility costs (including repairs or other unexpected investments)

In general, these calculations are intended to ensure that there is sufficient leeway for unexpected events. The earnings of several people can also count as income if they are jointly liable for the mortgage. A couple can therefore certainly pool their assets – but this will then be carefully reviewed to ensure the claim is secured.

A lawyer is familiar with the ins and outs of mortgages. These experts can perform calculations and help homebuyers calculate the mortgage and interest costs involved.

And a lawyer should always be consulted in private matters, too. A loan agreement with the general terms and conditions should always be signed for a private loan – even if parents or siblings are lending the money.

The same applies to gifts and inheritance advances. These transactions should always be carried out in accordance with legal regulations (see Articles 239 et seq. of the Swiss Code of Obligations [CO] for gifts). Depending on the exact nature of the gift, this must be documented in writing or even notarized (see Article 243 CO). Disputes over money can have a negative impact on relationships. For this reason, it is important to establish clear conditions. This can prevent disputes and ensure that each party is adequately protected.