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

Further Information

  • Share of market volume
    • approx. 90%
  • Description of providers
    • Full service bank
    • Mortgage bank
    • Special-purpose savings institution
  • Construction loan
    • www.bau-kredit.ch
  • Bank financing and risks of a credit squeeze
  • Mortgage financing in general
  • Residential mortgages
    • Viability
      • Housing costs should not exceed 25% – 30% of the income of the landowner or debtor
      • In past years the banks increasingly focused on the income of the borrower for financing owner-occupied property; there have recently been signs of a revival of equity capital
    • Measures on the mortgage market to prevent property prices overheating (sectoral, anti-cyclical capital buffer von 1%)
  • Financing of management properties
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