Swiss mortgages and Lombard loans are very popular among expatriates, foreign investors and native Swiss wishing to buy property or start a business. Let’s take a closer look at these popular sources of cash.

A mortgage loan is provided for the purchase of property, and, by definition, the property is pledged as security. This means that, as in any other country, the lender can repossess your house if you default! In fact, the lender holds the title to your house until the debt is completely paid off, and the lender will sell your house in order to get the money back if you can't make your mortgage payments. Your down payment is the lump sum you pay up front. You can put as much capital down as you want, but between 15 and 20 per cent is the minimum amount of security required by Swiss banks for a first property. The capital accumulated in a Swiss corporate pension can be used to finance your primary property. Non-Swiss are treated the same as native Swiss but negotiation is a must for everyone! The mortgage payment is made up of 1) Principal - This is the total amount of money you are borrowing from the lender after you've made your down payment and 2) Interest - This is the money the lender charges you for the loan. It is a percentage of the total amount of money you are borrowing.

The two main types of mortgage are:

Repayment mortgage

The mortgage is paid off over an agreed period usually in quarterly or yearly payments that gradually reduce the principal of the loan. This is called amortization. Initially the portion of your payment that goes to pay the interest is much higher than the portion that goes to the principal. A big advantage of a repayment mortgage is that at the end of the mortgage term, the main amount of the debt has been repaid.

Interest-only mortgage

With an interest only mortgage, your monthly payments to the lender only pay the interest charges. The actual mortgage balance - the amount borrowed - does not reduce. This means you must repay the capital part of your loan at the end of the mortgage term. To do this, you put money into a separate investment. This should grow and enable you to pay off the mortgage when required to do so. Market volatility has recently has put many people off saving with the stock market for their mortgage capital repayment. This is due to the poor performance of the stock market, causing investments which are maturing now to under perform. If the growth assumptions for an investment are conservative, however, there should not be a problem. An interest only mortgage is tax efficient in Switzerland because the interest is deductible. A tax efficient way of indirectly repaying the mortgage is to invest in a pillar 3A bank account, which is pledged to the mortgage lender (usually the same bank as provides the 3A account.)

Negotiate your rate

Many interest-payment plans are available on the Swiss market, for example: variable, fixed-term, money market, Libor and adjustable rate. These mortgage products are very similar although each bank often has their own product name. The rates are negotiable and negotiated discounts of between 0.1 per cent and 0.6 per cent can be shaved off the banks’ published mortgage rates. The discount will depend on the borrower’s situation, property and location, not to mention – of course – their negotiation skills!

Assets on deposit in a bank – such as equities, bonds, life insurance policies – are held in safekeeping (pledged) and can be readily borrowed against – with the assets as collateral – in order to cover financial shortages without having to dispose of the investments. The result is known as a Lombard loan, and is often used to bridge personal or business financial shortfalls. So the Lombard loan is a credit designed to cover liquidity requirements by pledging your securities in safekeeping and/or your account balance. The Lombard loan will equate to a percentage of the market value of the assets. The loan-to-value ratio depends on the type, currency, quality and tradability of the securities and is reviewed periodically. For example, for a portfolio comprising of mutual funds a bank will lend you around 60% of the portfolio value. The composition of your safekeeping account also plays a role. If the value of the assets held in your safekeeping account drops significantly, you must provide additional liquid assets or reduce the amount of the loan accordingly. This can cause major problems if the investor used the Lombard to purchase additional equity investments. This is known as leverage. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would have otherwise been. Leverage magnifies both gains and losses.

A Lombard is available in the form of a lump sum and like a mortgage you can fix the interest rate for an agreed period. The minimum credit limit is around SFr 100,000. But you can also secure a current account loan, which works like a conventional credit line. In this case you pay interest only on the amount of credit that is actually used, and a commission is often charged in addition to interest. The minimum credit is around SFr 30,000.

Summary of a Lombard loan:

• You profit from the return on your securities, yet also have additional capital at your disposal.
• You continue to receive the dividends and interest income generated by your assets held in safekeeping.
• You can undertake portfolio adjustments as you wish; the loan-to-value ratio will be modified accordingly.
• You can request a Lombard loan in Swiss francs or in a major foreign currency.
• In most Swiss Cantons the interest paid can be deducted to optimise your tax burden.
• You have the freedom to use the loan for whatever you desire, to increase the level of an investment, to buy a house abroad or even for a boat, a car or travel.