What is a building leasehold plot when acquiring a home?

Analysis: How building law works

To decide for or against a building lease for your own home , you need to understand the mechanics behind it. It's a mix of buying and long-term renting.

The legal separation: An artificial property

Legally, the right to build is registered as an easement in the land register. It receives its own land register entry.

• The structure: The house on the building leasehold plot for a private home is an independent property. You can mortgage it, sell it, or bequeath it, just like a normal house.
• The difference is that your ownership is limited in time. A building lease for a home is usually granted for 30 to 100 years. After that, the land – and often the house as well – reverts to the landowner.

The building lease rate: The perpetual rent

The biggest financial difference with a building lease plot for a home is the building lease interest rate.

Instead of paying a one-time fee of 800,000 francs for the land, you pay an annual interest payment to the landowner.

• The amount: The interest rate is often based on the land value and the current interest rate. For a building lease plot for a private home, this can quickly amount to 10,000 to 20,000 Swiss francs per year.
• The risk: Interest rates are rarely fixed. They are often linked to the national consumer price index or mortgage rates. If inflation rises, your building plot for your own home will also become more expensive. This is a cost risk that ordinary homeowners don't have (they "only" have the mortgage interest rate risk).

The reversion: When the clock runs out

Perhaps the most critical element for any building plot for a private home is the end of its term.

What happens after 50 or 99 years?

• Reversion: The building right expires. Ownership of the house passes to the landowner. Your house on the building lease plot is gone.
• The compensation: As a rule, the landowner must pay compensation for the building (the so-called reversionary compensation). But how much is this? Often, only the "technical current value" or a lump sum is agreed upon. In the case of a poorly negotiated building lease for a home, this can mean that you (or your heirs) receive only a fraction of the market value.
• The extension: Many contracts for a building plot for a private home include an extension option. However, there is often no legal entitlement to this.

Financing: The hurdles faced by banks

Banks are stricter with regard to building rights plots for homeownership than with regard to land ownership.

Why? Because the security (the house) loses value over time as the reversion date approaches.

• Higher amortization: While with regular ownership you only have to amortize the second mortgage, banks often require that the entire mortgage on a building lease plot for a home be paid off by the end of the lease term. This significantly increases the monthly payments.
• Loan-to-value limit: Banks often only lend up to 65% or 70% of a building lease plot for a home, instead of the usual 80%, because the risk is considered higher.

Resale: A difficult undertaking?

If you want to sell your house on the building lease plot for a private home after 15 years, it can get complicated.

• Remaining term: Buyers (and their banks) look at the remaining term. If the building plot for a home only has 20 years remaining, it is hardly financeable and therefore difficult to sell.
• Landowner: A private landowner is often less attractive to buyers than a public authority (municipality). With a municipality, it is assumed that they will extend the building lease for a home fairly; with private investors, there are concerns about profit maximization.

Who would benefit from this model?

Despite the risks, a building plot for a private home has advantages.

• Liquidity-friendly: Those with a high income (to pay the ground lease) but little savings (for purchasing the land) will find a niche here. A building lease plot for a home reduces the initial equity requirement by 30 to 50%.
• Location: Municipalities often allocate their best locations as building plots for private homes to prevent speculation and attract families. This way, you can acquire land that wouldn't otherwise be for sale.

Checklist before signing a contract

Before you decide on a building plot for your own home , check:

• Reversionary compensation: Is the market value or only the current value paid?
• Interest rate adjustment: How often and what factors influence the interest rate for building rights plots for home ownership ?
• Extension: Is there an option for another 30 or 50 years?
• Right of first refusal: Do you have a right of first refusal if the landowner sells the land after all?

Conclusion

The question "What is a building leasehold plot when acquiring a home?" reveals a model with both advantages and disadvantages. A building leasehold plot for a home is a speedy move-in, but a hindrance to building wealth over generations. You save yourself the expensive land purchase, but in return, you pay rent indefinitely and live with the end date of your ownership.

For young families with good cash flow who primarily want comfortable housing and don't necessarily see the house as an "inheritance for life," a building leasehold plot for a home is a viable option. However, those who view real estate purely as an investment should be cautious. The risk of rising ground lease interest rates and meager compensation upon reversion of the lease should not be underestimated. Examine the building lease agreement meticulously – it's more important than the house's floor plan.

If you want to calculate whether the ground lease interest rate is more expensive in the long term than a mortgage on land purchase, or if you want to have the contract for your ground lease plot for your own home reviewed neutrally, Loft offers detailed comparison calculators and expert analyses.

Glossary

• Building leasehold plot for a private home: A plot of land where ownership of the land is separate from ownership of the building. The homeowner pays rent for the use of the land.
• Ground lease: The annual fee ("rent") that the homeowner must pay the landowner for the use of the ground lease plot for their own home .
• Reversion: The point in time at the end of the contract period when the building reverts to the ownership of the landowner. The building right expires.
• Reversion compensation: The sum that the landowner must pay the building leaseholder at the end of the contract for the building on the building lease plot for a private home .
• Easement: The legal instrument in the land register that legally enables the separation of land and building in the case of a building right plot for a private home (independent and permanent right).