What is a mortgage?

In practice, financing consists of equity and the mortgage. How much the bank lends is shown by the loan-to-value ratio: in Switzerland it is common for banks to finance large shares of the market value, while a portion must be provided as equity. In addition, the bank checks affordability to ensure ongoing costs can be covered even if interest rates are considered over the long term. For this the bank calculates with a notional interest rate, amortization and ancillary costs; the total burden should not excessively strain available income.

Key factors are the interest rate, term and repayment method. For interest rates one mainly distinguishes fixed-rate mortgages with an interest fixed for several years and money-market mortgages (e.g., SARON-based) with periodically adjusted rates. Repayment (amortization) can be direct, reducing the debt over time, or indirect via tied pension savings (pillar 3a), where the mortgage remains constant and the pension assets are pledged. Which combination is suitable depends on risk tolerance, planning horizon and liquidity.

Often a distinction is made between first-ranking and second-ranking mortgages. The first tranche is considered less risky because it is better secured and is correspondingly cheaper. The second tranche covers the upper financing portion and usually has to be amortized within a set period. This structure is intended to ensure that the loan-to-value remains at a conservative level over the long term and cushions market fluctuations in property prices.

A mortgage involves costs and risks. Interest rates can rise and increase the monthly burden; with fixed-rate mortgages, early termination of the contract can incur prepayment penalties. If the market value of the property falls significantly, the loan-to-value ratio can rise on paper, making restructurings necessary. In addition, there are one-time acquisition costs such as notary and land register fees and, depending on the canton, property transfer taxes, as well as ongoing maintenance costs, which should be included in the budget.

Taking out a mortgage follows a clear process: the bank assesses the property, checks income, assets and affordability, prepares an offer and agrees on the terms. After signing the contract, the mortgage deed is registered in the land register. From that point the mortgage is paid out and the owner is responsible, in addition to interest and amortization, for maintenance and insurance — in return the mortgage enables access to homeownership that is often out of reach without external financing.