Bank Loan

In Switzerland the predominant form of property financing is to simply save at full service banks.

The primary providers of property of financing are:

• Cantonal banks
• High-street banks
• Rural banking cooperatives

The mortgage market has a vast range of products that are classified according to the following basic types of mortgage:

• Variable mortgage
  • Typology
    • The variable mortgage does not have a set term (it may be terminated on a quarterly or half-yearly basis) and the variable interest rate is based on the general level of interest rates
    • Reasons for choice: expectation of falling interest rates + possibly own interest in repayment
  • Interest rate
    • Interest rate adjustment by bank at its own discretion
    • Interest rate not determined solely on the basis of the refinancing conditions (repercussion on policy, also due to relevance of interest rate to the level of rent)
  • Termination
    • Right of termination of the borrower may adversely affect the net yield of the bank if the loan is terminated before the expiry of the anticipated (uncommitted) term
    • Repayment option of the customer, provided a repayment obligation has not been agreed
• Fixed-rate mortgage
  • Typology
    • The fixed-rate mortgage involves agreeing a fixed term for the mortgage and a fixed interest rate, e.g. 1 to 10 or even 15 years; the interest rate remains unchanged during the term of the mortgage.
    • Launch 1981
    •  Reasons for choice: expectation of rising interest rates + budget certainty
  • Interest rates
    • Interest rates are based on the money or capital market rates (refinancing transparency)
    • Frequently swap rate as base rate
  • Termination
    • Limited repayment risk
    • Early repayment (e.g. as a result of selling the property)
      • only at the market value
      • at the currently lower refinancing interest rate the bank has to compensate for the loss of interest (= so-called early repayment charge)
• LIBOR mortgage
  • Typology
    • The LIBOR mortgage is concluded for a fixed term of three to twelve months; the interest rate is based on the LIBOR rate and is adjusted periodically (money market rate + bank margin)
    • Hedging options (depending on the bank)
      • against falling interest rates
        • Minimum interest rate (floor)
        • Consequence: cheaper conditions
      • against rising interest rates
        • Interest rate cap
        • Additional costs (premiums)
    •  Reason for choice: expectation of falling interest rates
  • LIBOR mortgage
    • Reasons
      • Flexible financing
      • Based on money market interest rate
      • No lock-in periods
    •  LIBOR-based interest rate [LIBOR = London Interbank Offered Rate]
    • Calculation of the interest rate on a LIBOR mortgage: LIBOR interest rate + individual bank margin
    • Calculation of the interest rate on a LIBOR mortgage with interest rate hedging: LIBOR interest rate + individual bank margin [e.g. 1,350%] + Premium share for interest rate hedging = interest rate
  • Swap mortgage
    • Reasons
      • Management of extensive credit or investment portfolios [Asset and Liability Management (ALM)]
    • Interest rate usually money market based [SWAP = interest rate swap / derivative interest rate instrument]
• Combined forms / portfolio mortgage
  • Typology
    • see above
  • Examples
    • Mixed mortgage (consisting of a variable and fixed interest tranche)
    • Fixed term mortgage with cap (strike)
    • Combined LIBOR mortgage and swap (> mortgage with a fixed interest rate)
    • Portfolio mortgage (consisting of a fixed-term loan, which comprises several fixed-rate capital tranches which are payable on a quarterly basis and are continually renewed)

The collateral security depends on the purpose of the pledge, since there are not yet any hedging options against fluctuations in the value of a mortgage:

• Residential Properties
  • Detached houses / condominium ownership (owner-occupied property)
    • 1st mortgage (lending limit usually 2/3 of the market value)
    • 2nd and additional mortgages (lending limit:
    • total lending limit: 80% of the market value)
    • 20% of the market value is factored in for interest rates and (commercialisation) costs in the event of commercialisation
  • Multiple dwellings (investment property)
    • Lending limit: 70% – 80%
• Office properties
  • Lending limit: 50% – 80% of the market value, depending on the construction date and flexibility of use
• Commercial properties
  • Lending limit: 50% of the capitalised earnings value
• Industrial areas and specialist properties
  • Individual lending limits