Buy vs. rent: Is it worth buying property over renting in Switzerland?
The impact of mortgage rates
For many years, buying property in Switzerland was almost always cheaper than renting. This was largely due to a period of record-low interest rates, which kept mortgage costs low and made homeownership particularly attractive. However, recent changes have complicated the situation, and the decision is no longer as clear-cut.
Starting in early 2022, interest rates rose sharply due to global economic factors such as the war in Ukraine and inflationary pressures from energy prices and post-COVID effects. Fixed mortgage rates, which were below 1% at the beginning of 2022, tripled over the course of just a few months. SARON mortgages also followed this trend due to rate hikes by the Swiss National Bank (SNB).
However mortgage interest rates in Switzerland have since fallen to around 2% again. Over the course of 2024, fixed-rate mortgage interest rates in Switzerland have been stable, while SARON mortgage rates have dropped to almost the same level following the SNB's rate cuts in March and June 2024.
Is it cheaper to buy or rent in 2024?
A recent UBS study found that starting in the coming months, buying will once again be cheaper than renting.
As of mid-2024, buying property in Switzerland is on average slightly more expensive than renting. However, the costs of homeownership have gone down significantly over the last months, and the market is in fact approaching parity as a recent UBS study pointed out. This means that starting in the coming months, buying will once again be cheaper than renting. For people wondering whether it is worth buying property in Switzerland, it's thus a good time to start looking now.
Financial impacts of buying property in Switzerland
When deciding whether it's worth buying property in Switzerland, it's important to understand the financial implications of becoming a property owner. Here are some key points to consider:
- Mortgage and down payment: Swiss banks will mortgage a property up to 80% of the property's value or purchase price, whichever is lower. This means you will need to contribute at least 20% of the purchase price in cash, 10% of which may be pension fund savings.
- Amortization requirements: The mortgage portion exceeding 66% of the property's value must be amortized before retirement or within 15 years of the purchase, whichever comes first. This requirement helps mitigate the bank’s risk, as income typically decreases significantly upon retirement.
- Additional costs: Purchasing property involves one-time costs such as notary fees, land registry fees, and transfer taxes. These costs vary between cantons, and not all are levied in every canton.
- Affordability: Banks calculate the affordability of a mortgage to ensure your financial stability and mitigate the risk of default. Total costs, including mortgage interest, amortization, maintenance, and utilities, should not exceed one-third of your income. An imputed interest rate of around 5% is used to stress-test your ability to afford the property even in case of rising interest rates.
By understanding these factors, you can better assess the financial impact of buying property in Switzerland and ensure it aligns with your long-term financial goals.
Buying an investment property in Switzerland
Investing into a commercial or rental property can be worth it in Switzerland. Several factors influence potential returns, such as rental income, the purchase price, operating costs, and vacancy rates. Some of the key advantages that make buying investment properties worth it in Switzerland include:
- Stable returns: Properties in central areas or well-connected suburbs often have low vacancy rates and stable returns.
- Hedge against inflation: Real estate is often seen as a hedge against inflation, as property values and rents tend to rise with inflation, though this is subject to debate.
- Value appreciation: Property values, especially in growing or developing areas, can increase over time. Historically, the prices of rental properties in Switzerland have almost doubled over the last 25 years.
- Regular income: Rental properties generate steady rental income. While returns on residential properties may be slightly lower compared to other investments, they tend to be very stable.
- Leverage through financing: You can use borrowed capital to finance real estate investments, which can increase your equity returns.
In conclusion, while buying an investment property in Switzerland has its complexities and risks, the potential for stable returns, historical value growth, and security makes it a worthwhile option for many investors.
What financing options are available for buying property in Switzerland?
Fixed-rate mortgages
Fixed-rate mortgages are the most popular choice among Swiss property owners. The interest rate is set at the beginning and remains constant for the entire term, allowing for precise financial planning. Borrowers are shielded from rising interest rates over the duration of the mortgage, and the duration of the mortgage term can be negotiated to suit individual needs, typically ranging up to 10 years or longer. However, fixed-rate mortgages cannot take advantage should interest rates decrease during the term.
SARON mortgages
SARON (Swiss Average Rate Overnight) mortgages are the Swiss equivalent of tracker mortgages, replacing the former LIBOR-based products. In a low interest rate environment, SARON mortgages often have the lowest rates. Borrowers benefit directly if market interest rates fall during the mortgage term. However, mortgage payments will fluctuate with market rates, making budgeting more challenging.
Variable mortgages
Variable mortgages have interest rates set by the lending institution rather than tracking a specific market rate. These mortgages can be redeemed at any time, subject to the notice period, making them ideal for short-term needs. However, they generally have much higher rates compared to fixed or SARON mortgages.
Benefits and drawbacks of different mortgage types
|
Mortgage Type |
Benefits |
Drawbacks |
|
Fixed-rate mortgage |
Stability, predictable payments, protection from rate hikes |
Less flexibility, no benefit from falling rates |
|
SARON mortgage |
Potentially lowest cost in low rate environments, benefits from rate decreases |
Unpredictable costs, full interest rate risk |
|
Variable mortgage |
High flexibility, no fixed term, suitable for interim financing |
High interest rates, lack of transparency |
Can I buy property in Switzerland as a foreigner?
The Lex Koller law places restrictions on foreigners and non-residents purchasing certain types of residential properties in Switzerland. Here's a breakdown based on citizenship and residency status:
- Swiss citizens: Can buy all types of properties.
- UK nationals living in Switzerland: Can buy all types of properties.
- EU/EFTA nationals living in Switzerland: Can buy all types of properties.
- Non-EU/EFTA nationals with a C permit: Can buy all types of properties.
- Non-EU/EFTA nationals with a B permit: Can buy a primary residence or building land without a permit and holiday homes with permission.
- Non-residents (foreigners living abroad): Can buy secondary residences and holiday homes in designated tourist zones, subject to quotas and authorization.
These restrictions apply to residential properties only, including houses, apartments, and rental properties. There are no restrictions on foreigners purchasing commercial properties in Switzerland.
An important exception to Lex Koller applies to Swiss real estate companies and investment funds. Shares of real estate companies listed on a Swiss stock exchange can be purchased by foreigners without any restrictions. However, if a real estate company is not listed and primarily deals in residential or non-commercial properties, foreign nationals are prohibited from buying its shares.
Tips for prospective property buyers in Switzerland
Use real estate platforms and (free) services
Using the advanced search functions on real estate portals and websites can make all the difference in finding what you are looking for. Consider creating a free account to benefit from the full range of features and services available. As an example, with a free account on Neho, the real estate marketplace of the brokerage firm of the same name, you will benefit from:
- Early Access: Access to specific properties 3 days in advance.
- Search alerts: Comprehensive filtering as well as alerts as soon as a matching property is published.
- Virtual viewings: Access to all information about the properties for sale, including the virtual viewing and the full address.
Set a realistic budget
Establishing a realistic budget is crucial for a successful property search. Get your financing sorted out early to avoid any last-minute surprises. It's a good idea to consult with a financial advisor to understand your maximum purchase price based on your income and assets. Remember, it’s better to focus on what you can afford rather than getting your hopes up with properties that are far beyond your budget.
Plan ahead and be patient
Finding the perfect property takes time, so start your search as soon as you can. The more time you have, the better your chances of finding a place that truly fits your needs and desires. In addition, the more purchase options you have available, the stronger your negotiating power will be.
Stay flexible
The Swiss property market is very competitive, especially in high-demand areas such as in the city centres of Zurich, Basel, or Geneva. Most buyers with a typical budget will need to make some compromises along the way. Determine which property features and amenities are non-negotiable (say, the location or the size), and where you might be willing to compromise.
