Most people only buy an apartment or a single-family home once in their lives. A broker and a mortgage specialist report on the obstacles home buyers should be prepared for.
The average private household has invested more than half of its net assets in real estate. This is according to data from the Swiss National Bank.
This makes it all the more important to proceed meticulously when buying your own apartment or a single-family home. Careless mistakes can have expensive consequences. This applies both to the search for a suitable property and to taking out a mortgage.
Anyone who buys a new property has to deal with a multitude of parties involved, all of whom have their own financial interests but do not always play with open cards. Be it the estate agent, the general or total contractor, the architect or the bank.
An overview of known pitfalls.
Blind trust in a new construction project
For a new construction project, you should always obtain references from the seller, but also from the general contractor and the architect before the contract is notarized. If you have already notarized the purchase contract and transferred the deposit, it is too late.
The preliminary investigations should focus on solvency issues and construction quality. It is a warning sign if you cannot find out anything about a company involved in the construction, says Zurich real estate agent Rolando Guglielmetti.
On the other hand, if the company can already demonstrate several successfully completed projects, that is a good sign. “Most companies do really good work, but unfortunately there are also a few that have caused problems in the past,” says Guglielmetti.
If in doubt, you should ask for an extract from the debt collection register of the respective contracting party. He himself has experienced a general contractor going bankrupt in the past. “The other partners involved were able to save the project. But the case shows that you shouldn’t use your money carelessly.” It is sensible to transfer down payments to a blocked account or to a dedicated and project-related account that is monitored by the bank whenever possible.
Deciding under time pressure when purchasing an existing property
The probability of securing an apartment in a new building project is, however, comparatively small, as construction activity in this area is modest. The supply of existing properties is larger. Especially since the interest rate turnaround, more existing properties have come onto the market.
But even when buying an existing property, you should look closely and not make hasty decisions – for example, out of fear that someone else could snatch the property away from you. You should definitely view the property more than once to identify potential weak points and to ensure that you do not pay a price significantly above the market value. An absolute no-go with existing properties is buying based on photos on the Internet, i.e. without even viewing the property.
For older properties, it is worth consulting an architect or another specialist who can help you assess the building structure. For example, if the house with the dream view is on a slope and you discover cracks in a wall, this could indicate poor construction. In order to estimate the costs of a planned renovation, it is also a good idea to work with specialists. For older properties, you can generally expect higher maintenance and ancillary costs, as well as renovation costs depending on the condition.
The energy performance of the house, i.e. the insulation and the heating, is becoming increasingly important, says real estate agent Guglielmetti. “The kitchen or bathroom are less important.”
Not negotiating enough when taking out a mortgage
Blind trust is also out of place when taking out a mortgage. The mortgage interest rates that banks publish on their websites are often what are known as window rates. They are deliberately set high so that customer advisors have the opportunity to offer generous discounts in personal discussions. A marketing tool, in other words.
If you don’t compare and get several offers, you run the risk of burdening yourself with unnecessary additional financial burdens when it comes to mortgages with long-term fixed interest rates. “Hardly any bank will give you the best possible interest rate on its own. In many cases, negotiations with the customer advisor are reminiscent of a bazaar,” says Florian Schubiger, co-founder of the consulting company Vermögenspartner and operator of a mortgage comparison platform. If you get offers from five different banks before making a deal, you can assume that the best offer isn’t too bad.
Schubiger advises caution when it comes to eco-mortgages, where mortgage lenders offer lower interest rates for properties that are built to ecological standards. Sustainability discounts often only apply to part of the mortgage or are limited in time. This puts the size of the discount into perspective when you consider that it often also applies to the window interest rates.
As a customer, you should be aware that some banks encourage their advisors to sell certain types of mortgages more frequently, depending on the situation in their own balance sheet and the macroeconomic environment. Fixed-rate mortgages are more lucrative for the banks and bring them a higher margin. However, in times of low general interest rates, selling money market mortgages is also attractive.
Financial miscalculation in the mortgage
Money market mortgage or fixed-rate mortgage? Two or ten years? Two or three tranches? There are many options when it comes to taking out a mortgage. Many home buyers rely on their gut feeling when making their decision.
However, financial advisor Schubiger advises against taking out mortgage tranches with very different terms. When the tranche with the shorter term expires, you usually have no choice but to stay with your current mortgage lender. “This weakens your negotiating position and in most cases you will no longer receive a competitive interest rate when you renew your mortgage. It is better not to stagger the terms too much.” He advises not to allow more than 12 to 18 months difference between the terms.
Anyone who opts for a money market mortgage based on the Saron reference interest rate should ensure that they can continue to sleep soundly even if interest rates rise significantly. The past two years have shown that an abrupt change in key interest rates is not just a theoretical possibility.
In addition, older home buyers should be careful not to tie up too much equity in their home in case they need liquidity again in the future. However, it makes no sense to have large, low-interest sums in the bank account while paying interest on a high mortgage. “In this way, you are effectively financing your own mortgage and becoming a water heater for the bank,” says Schubiger.
Time pressure can also be a factor when taking out a mortgage. It happens that home buyers who have been awarded a contract by the seller are kept waiting until the last minute by the mortgage lender, says financial advisor Schubiger. He advises caution when an advisor says things like: “If you decide today, I’ll give you a discount of 0.1 percentage points.” Or when the lender wants to sign the contract before the interest rate is set.
Not paying enough attention to the small print
When buying a home, you have to deal with purchase contracts, construction specifications, work contracts and other documents. If you read the small print carefully and get advice, you can save yourself a lot of trouble in the event of construction defects and delays. It can become inconvenient if the general contractor passes liability for defects in the contract on to subcontractors – which is often the practice today.
The same applies to mortgages: some banks include an exclusion of offsetting in their loan agreements, which is disadvantageous for the debtor if the bank goes bankrupt. The debtor is still left with the full mortgage debt, but loses the part of his deposits that exceeds the 100,000 francs guaranteed by the deposit insurance. Anyone who is uncomfortable with this can request that this clause be deleted so that, in the worst case scenario, debts and credits can be offset against each other.
According to consultant Schubiger, certain banks also reserve the right to “securitize” the real estate loan, i.e. to resell it to other players in the financial market in order to obtain liquidity. The investor who takes over the mortgage from the bank could be less squeamish with the homeowner in the event of a crisis or if the customer defaults on payment than the main bank would be. Anyone who does not want to take this risk can request that these clauses be deleted from the contract and switch to another lender.
NZZ Live Event: Owning your own home: How the dream becomes reality
From a financial perspective, is it still attractive to buy your own home? We discuss developments in the Swiss home ownership market, the options for real estate financing – and how this relates to retirement planning.
Wednesday, 22 November 2023, 6:30 p.m., NZZ Foyer, Zurich, and online
Tickets and further information can be found here