What do I need to do to get a mortgage to buy my own home?

The key obstacles to lending in detail

To obtain a mortgage, you must pass a series of financial assessments. The bank reviews your application based on fixed criteria that leave little room for interpretation. Here you can find detailed information on the requirements you must meet to finance your home.

The first hurdle: equity capital and loan-to-value ratio.

The first of the key requirements for home financing concerns your assets. You cannot buy a house without contributing your own money. Generally, banks finance a maximum of 80 percent of the lower of the purchase price or market value. Conversely, this means you must demonstrate at least 20 percent equity.

However, be careful, the requirements for home financing are very specific regarding the origin of the money:

• Solid equity: At least 10 percent of the purchase price must be "real" money that is not pledged. This includes savings, securities, advance inheritances, or gifts. This 10 percent must not come from the pension fund (2nd pillar).
• Soft equity: The remaining 10 percent can come from pledging or early withdrawal from the pension fund.

Those who don't meet these requirements for home financing and, for example, only have 15 percent equity, generally won't receive a mortgage – even if their income is very high. The loan-to-value ratio is a hard line.

The second hurdle: Financial feasibility

Most dreams don't burst because of a lack of savings, but because of affordability. This is one of the strictest requirements for home financing . The bank doesn't examine your current expenses, but rather simulates a stressful future situation.

Even if you can get a mortgage today for under 2 percent interest, banks calculate their home financing requirements using a notional interest rate of 5 percent (sometimes 4.5 percent). The reason: The bank wants to ensure that you won't be forced to sell your house if interest rates rise to historically high levels .

The calculation for the requirements of home financing looks like this:

• Calculated interest rate: 5% of the total mortgage amount.
• Amortization: Approx. 1% of the mortgage amount (repayment of the 2nd mortgage).
• Additional costs: Approx. 0.7% to 1% of the market value (for maintenance, heating, water).

According to current regulations for home financing, the sum of these three cost categories must not exceed one third (33%) of your gross household income.

For example, to take out a mortgage of 800,000 Swiss francs, you need to be able to cover estimated costs of around 56,000 Swiss francs per year. According to the guidelines for home financing, this requires an annual income of approximately 170,000 Swiss francs.

The third hurdle: Property valuation and the lower of cost or market principle

An often underestimated aspect of home financing requirements is the value of the property itself. Imagine you agree on a price of 1.2 million Swiss francs with the seller. However, the bank only values the property at 1.0 million.

lower of cost or market principle applies . The bank calculates the maximum loan-to-value ratio (the 80%) based on the lower valuation, i.e., the 1.0 million.

The difference of 200,000 francs will not be financed. You must contribute it as additional equity . The requirements for home financing are unforgiving here: the bank does not finance inflated prices, but only the sustainable market value.

The fourth hurdle: Amortization and repayment

Long-term requirements for home financing include the obligation to reduce debt. The mortgage is usually divided into two tranches:

• 1. Mortgage: Up to 65% of the loan-to-value ratio. This does not necessarily have to be repaid (although it is often advisable).
• 2nd mortgage: The portion between 65% and 80% loan-to-value ratio.

Home financing regulations mandate that the second mortgage be fully repaid within 15 years or by retirement age (whichever comes first). This payment places an additional burden on your monthly budget and is a fixed component of the affordability calculation.

Special features for expats and documentation

Depending on their status, newcomers are subject to additional requirements regarding home financing .

• Permanent residence permit C: You will be treated like a Swiss citizen.
• Residence permit B: EU/EFTA citizens can usually purchase their primary residence without problems. For third-country nationals or holiday properties, the Lex Koller often applies, restricting acquisition.

Furthermore, to verify eligibility for home financing, the bank requires a complete dossier: pay slips, tax return, debt enforcement extract, pension fund statement, and property details. Missing documents will lead to rejection.

Conclusion

The question "What do I need to do to get a mortgage?" can be reduced to a formula: 20 percent assets plus an income that still leaves room for adjustment even at a 5 percent interest rate. The requirements for home financing are conservative, but they protect you from over-indebtedness.

Don't let the strict requirements for home financing discourage you. There are often opportunities, for example, through advance inheritances, additional collateral, or the inclusion of regular bonus payments. It's important that you understand the requirements for home financing before you fall in love with a property. Those who do their homework and realistically calculate the requirements for home financing will be on equal footing with the bank.

If you want to check whether you meet the strict requirements for home financing for your desired property or how much house you can afford, Loft offers precise affordability calculators and neutral analyses for preparation.

Glossary

• Requirements for home financing: The entirety of the rules (equity, affordability) that must be met for a bank to grant a mortgage.
• Affordability: The ratio between the calculated housing costs and gross income. According to the regulations for home financing, this ratio may usually not exceed 33%.
• Loan-to-value ratio: The percentage of the mortgage amount relative to the property's market value. Home financing regulations typically limit this to 80%.
• Lower of cost or market principle: The rule that the lower of the purchase price or bank appraisal applies for financing purposes. An important part of the requirements for home financing .
• Calculated interest rate: A fictitious interest rate (usually 5%) that banks use to ensure long-term compliance with the requirements for home financing .