Buying a property is a major project that requires careful planning, particularly in financing. One of the first criteria to consider is the loan-to-value and debt ratio.
Understanding the loan-to-value rate
The loan-to-value rate is the rate between the amount of the loan and the value of the property as determined by the lender. It's important to know that the loan-to-value rate varies according to the property type. For a residential property for own use, the loan-to-value rate is generally set at 80%, while for an investment property, it is 75%. So, you are planning to buy a property of your own. In that case, you can expect the lender to grant you finance of up to 80% of the property's loan-to-value rate, which is the rate between the amount of financing and the value of the object retained by the lender.
- 80% for any residential property for own use
- 75% for an investment property
Your mortgage is made up of
- A 1st mortgage loan that you do not necessarily have to repay.
- A 2nd mortgage loan you must repay within 15 years or before retirement age.
Understanding the debt ratio
The debt ratio is another important criterion for defining your financing needs. This is the rate between the annual sum of charges (notional interest, depreciation, and property maintenance costs) and your total gross income. This rate measures the proportion of your gross income that will go towards repaying your loan. The debt ratio should be at most one-third of your total gross income. If your gross income is CHF 120,000 yearly, your total repayment costs should be at most CHF 40,000. However, it is important to note that this rate may vary according to the practices of each lender.
How can you use these criteria to define your financing needs?
By combining the loan-to-value rate and the debt ratio, you can determine the amount of finance you need to buy your property in Switzerland. To do this, you can calculate the maximum amount you can borrow using the loan-to-value rate and then check whether the repayment charges for this loan are less than or equal to one-third of your total gross income. If not, you can reduce the loan amount until the debt ratio is respected.
You can also contact one of our Financing Solutions specialists.