How much equity do I need to buy a home?

The financial foundation: facts, figures and strategies

The golden 20 per cent rule

If you want to buy your own home in Switzerland, there is one ironclad rule of thumb: banks normally finance a maximum of 80 per cent of the lower of the purchase price and the market value estimate. Conversely, this means that you must contribute at least 20 per cent of your own capital.

For example, if you want to buy a home for £1 million, the bank will expect you to contribute £200,000 from your own funds. The remaining £800,000 will be granted as a mortgage. The more equity you contribute when buying a home, the lower your debt will be and the better interest rates you can often negotiate.

“Hard” vs. “soft” equity: it’s the composition that counts

It is not enough to simply have "any" assets if you want to buy your own home. The Financial Market Supervisory Authority and the Bankers Association prescribe strict rules on how these 20 per cent may be composed. A distinction is made between "hard" and "soft" funds.

Anyone who wants to buy a home must have at least 10 per cent "hard" equity. This may not come from the 2nd pillar (pension fund). Hard funds include:

• Bank deposits (savings account, salary account)
• Securities (shares, funds, bonds)
• Pillar 3a assets (private pension provision)
• Gifts or advance inheritance payments (must be confirmed in writing)

If you want to buy your own home, the remaining 10 per cent can come from your occupational pension (pension fund). You can withdraw these funds early or pledge them as collateral. However, please note that early withdrawal reduces your retirement benefits and triggers an immediate capital gains tax. Nevertheless, for many families, early withdrawal from their pension fund is often the only way to buy their own home.

The underestimated hurdle: incidental purchase costs

A classic beginner's mistake when planning to buy a home is to focus exclusively on the price of the property. It is essential to factor in the additional purchase costs. These fees are not usually financed by the bank and must be paid in addition to the 20 per cent equity from liquid funds.

When you buy a home, the following costs apply, depending on the canton:

• Transfer tax: In cantons such as Bern, Vaud and Jura, this is a significant expense (often over 2-3%). In Zurich and Schwyz, it is usually waived for residential properties.
• Notary fees: For the public certification of the purchase agreement (approx. 0.1% to 0.5%).
• Land registry fees: For the registration of the transfer of ownership.
• Mortgage deed fees: Costs for establishing the lien.

Experts strongly advise that if you want to buy your own home, you should set aside a flat rate of 3 to 5 per cent of the purchase price for these additional costs. For a house costing CHF 1 million, this can quickly add up to an extra CHF 50,000 that you need to have available before you can buy your own home.

Affordability: the bottleneck for banks

Even if you have sufficient savings, your plan to buy a home may fail due to so-called affordability. The bank checks not only your assets but also your income. The question is: can you afford the running costs even if interest rates rise?

Banks take a conservative approach here. If you want to buy a home, the bank usually calculates with a theoretical interest rate of 5 per cent (even if the real interest rate is lower), plus 1 per cent for amortisation and approximately 1 per cent for maintenance.

The rule is: these total calculated costs must not exceed one third of your gross household income. If you want to buy your own home and your income is tight, there is often only one thing you can do: put in more equity to reduce the mortgage. Strategically, it may be necessary to contribute 25 or 30 per cent of your own funds in order to successfully buy your own home.

Regional differences and personal circumstances

The answer to the question "How much money do I need?" depends heavily on where you want to buy a home.

• Location: In Zurich or Geneva, the 20 per cent hurdle often means absolute sums of over 300,000 or 400,000 Swiss francs that you have to raise in order to buy a home. In rural areas, the entry barrier is lower.
• Valuation: If you want to buy a home in a peripheral region, the bank may value the property at less than the purchase price ("lower of cost or market principle"). You will then have to pay 100 per cent of the difference out of your own pocket.
• Status: Even as a newcomer (expat), you can buy your own home in Switzerland. EU/EFTA citizens residing in Switzerland are treated the same as locals. For third-country nationals, buying a home for their own use at their main residence is usually also possible without a permit.

Conclusion

The question of the necessary capital is more complex than a simple percentage. If you want to buy your own home, you must expect to pay at least 20 per cent of the purchase price as a basis. Of this, 10 per cent must be "hard" equity. However, in order to be able to buy your own home securely and sustainably, you should calculate with 25 per cent of the purchase price in liquid funds, including non-financeable ancillary purchase costs and a buffer for renovations.

In addition, affordability is often a bigger hurdle than pure wealth. If you want to buy your own home, check early on whether your income can withstand the banks' stress tests. Don't be blinded by low interest rates; plan conservatively. Buying your own home is a marathon, not a sprint – solid preparation is the key to success.

If you are looking for support in analysing your financial options, Loft offers professional help to make the process efficient.

Glossary

• Equity: Financial resources that the buyer contributes from their own assets. If you want to buy a home, this is the difference between the purchase price and the mortgage (min. 20%).
• Loan-to-value ratio: The ratio of the mortgage debt to the market value of the property. A maximum of 80% is common when buying a home.
• Incidental purchase costs: Fees such as notary, land registry and transfer tax, which are incurred when you buy a home and are usually not financed by the bank.
• Affordability: Ratio between gross income and ongoing property costs. If you want to buy your own home, you can usually spend a maximum of 33% of your income on it.
• Hard equity: Capital that does not come from a pension fund (e.g. savings, pillar 3a). At least 10% is required to buy a home.