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More or less equity ?

Several elements need to be considered when deciding how much of your assets you’d like to invest into the property you are buying.

 

Of course, your monthly payments once a owner(s) will play a role in that decision, but it shouldnt be the only aspect. Assets profitability and tax impact should also be examined.

 

Options to consider

 

Depending on your finances, it is regularly possible to request a mortgage loan representing 90% or even 100% of the purchase price. However, asking for a higher loan needs to make sense financially.

 

The higher the mortgage, the higher the monthly interest. Also, the higher the monthly interest, the more tax deduction will be available to you.

 

When refinancing, it is also possible to extract cash from the equity in your home, by increasing the loan.

 

Exemple :

 

A person is buying a property for CHF 1 mio. She has CHF 300k cash (not including the closing costs), and CHF 400k from its pension fund. Her marginal tax rate is 35%

 

She could decide to invest all of her assets into the property (CHF 700k) and ask for a mortgage loan of CHF 300k. On the contrary, she could also pay the minimum down payment, and request a loan representing 90% of the purchase price.

 

Decision process

 

If this buyer is being offered a loan with a 2% interest rate per year over the span of 10 years, it will actually cost her 1.3% per year, including the marginal tax rate (2% = gross / 1.3% = net).

 

The question will be then to estimate what she will do with the remaining cash :

 

  • If the cash is going to sit on a bank account with for exemple a 0.1% gross yearly return, then it wouldnt be advised to request a high mortgage loan (what is the point of paying 1.3% net on your loan if the money left generates 0.065% net on your bank account ?)
  • If this buyer is planning on generating an annual 3% gross return over the span of 10 years with her cash, then requesting a higher loan should be the option. Her net return will be 1.95% when the net costs of the loan will be of 1.3%

 

Depending on your situation, we will gladly advise you on your options, and the elements to consider before making your decision.

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