Mortgage or Lombard loan: which option is right for you?
The financing strategy for a property is a key question when planning a real-estate purchase. Are you wondering about the relative advantages and disadvantages of mortgages and Lombard loans? We explain what you need to consider to help you make the right choice for your real estate project.
The mortgage: financial stability and sustainability
The mortgage loan is a well-established and widely used financing option in Switzerland. It enables you to acquire a property by using the property as collateral when taking out a loan.
The real-estate property is pledged in favour of the financial institution providing the loan to create security for the lender in the event of default on repayment. Thanks to this collateral, borrowers can access more favourable interest rates and larger loan amounts than with other types of credit.
The mortgage in detail
To begin with, we advise you to take the time to clearly define your real estate project. If you feel the need, seek advice. A real estate financing professional will help you analyse your needs and objectives, considering each element with the utmost care. The aim of this in-depth analysis is to clarify your financing possibilities and to work out a tailor-made solution that precisely meets your needs.
Many factors are involved in determining your financing potential.
- Your income: this is the determining factor. The annual sum of property-related costs, including interest calculated at a theoretical rate of 5%, depreciation as well as maintenance costs, should ideally be kept below a third of your annual gross income.
- Your own funds: these come from your savings and pension assets, including the 2nd and the 3rd pillar in Switzerland. At least 20% of the value of the property must be financed by your personal contribution, including at least 10% from your private savings reserves.
- The value of the property: this is the lowest appraised value between the purchase price and the value retained by the financial institution providing the loan.
- Guarantees: to optimise your terms or increase the amount of the mortgage, additional guarantees such as pledging insurance policies, provident funds or bank assets can be considered. This approach offers greater flexibility and opportunities to meet your financial needs.
Did you know ? In order to accompany you at every stage of your life projects, the private bank Piguet Galland offers a range of tailored financing solutions, including mortgages adapted to Swiss real estate. Building up a property portfolio, second home, rental investment: whatever the nature of your real estate project, your private bank team is ready to assist you in this decisive step.
The different mortgages
Understanding the different types of mortgage is essential to making the right choice.
- Fixed-rate mortgage: in Switzerland, the fixed-rate mortgage is the most widely used loan model for financing the purchase of a main home or a condominium apartment. This formula involves a fixed interest rate for the duration of your contract.
- Variable-rate mortgage: the variable-rate mortgage is based on money market interest rates. The interest rate on the loan may fluctuate depending on economic conditions and benchmark rates.
- SARON mortgage: the SARON mortgage is indexed to SARON (Swiss Average Rate Overnight) interest rates, which reflect short-term interest rates in Switzerland. This rate is determined daily.
When the mortgage contract with your bank expires, you have the choice of selling the mortgaged property to repay your loan or taking out a new mortgage.
The benefits of a mortgage
The mortgage offers different advantages, depending on its nature:
- Financial stability: opting for a fixed-rate mortgage offers you financial stability and predictability thanks to a constant interest rate over a defined period. You can then plan your monthly payments with confidence, regardless of fluctuations in the money market.
- Fixed-rate mortgages are particularly attractive during periods of low interest rates, giving you an opportunity to lock in favourable terms for a set period. Generally speaking, interest rates on a fixed-rate mortgage are lower than on other forms of credit.
- A lower monthly payment: Thanks to variable-rate and index-linked mortgages (SARON), you can also benefit from lower monthly payments and potential long-term savings when market interest rates are low.
The disadvantages of a mortgage
The fixed-rate mortgage can also have its drawbacks. If interest rates fall after taking out a fixed-rate loan, you could pay a higher rate than the market rate. It's also a risk of missing the opportunity to take advantage of potential interest rate decreases during the term of your loan. If you make a repayment before the contract expires, you may be liable to pay compensation equivalent to the interest on the entire contract.
Variable-rate mortgages are subject to the uncertainty of interest rate fluctuations. If rates rise, your monthly payments can quickly become higher. This change implies budgetary flexibility and the ability to manage risk.
The mortgage: for which profile?
A mortgage is a preferred option for borrowers looking to acquire residential property. If you're looking for stability and have a low appetite for financial risk, a fixed-rate mortgage may be the ideal choice. This type of loan is suitable for families looking for long-term financial security and wishing to avoid market fluctuations.
The variable-rate mortgage is more suitable if you're investing in real estate for speculative reasons.
Lombard loans: flexibility and immediate liquidity
The Lombard loan is based on using your assets (securities, shares, investment funds, etc.) as collateral when borrowing. This type of loan exploits leverage, enabling you to obtain liquidity while retaining ownership of your pledged assets. Leveraging means taking on more debt to extend your investment capacity. The underlying objective is to generate profits from this investment that exceed the costs of the debt incurred.
The totality of your assets cannot generally be used as collateral. For low-risk securities, only around 80% of their value can be used as collateral. The maximum amount reaches 50% for equities.
Lombard credit in detail
When you consider a Lombard loan with our private bank, you can choose between two options : a fixed-term advance or an overdraft facility.
Fixed-term advances offer a stabilised interest rate for periods of 1 to 12 months. However, fluctuations in stock markets and exchange rates can lead to changes in the value of your portfolio. In the event of a decline, this may lead to a reduction in your credit limit and require additional collateral or liquidation of positions.
Sometimes, you may need more financing flexibility. The current account limit is a form of revolving credit that can help you in this case. It is associated with a variable rate and is based on the value of your movable or immovable assets. The interest rate associated with a current account limit is generally variable, meaning that it can fluctuate in line with market interest rates. You can use the funds made available up to the amount of the limit granted by your financial institution, respectively repay all or part of it at any time, as long as you comply with the relevant terms and conditions.
The advantages of Lombard loans
Lombard loans offer rapid access to cash without requiring the sale of assets, which is ideal for meeting urgent financial needs or seizing opportunities. The choice between a fixed-term advance or a current account limit allows precise adaptation to individual circumstances.
Finally, the application and approval process are generally quicker than for a mortgage.
The disadvantages of Lombard loans
Lombard loans also have drawbacks. Interest rates are often higher than for mortgages due to the risk associated with collateral security. Costs can therefore be higher in the long term.
If payments are not made, liquidation of assets is pronounced in favour of the bank to repay the loan.
For large loan amounts, Lombard loans may not be the best option: this type of loan is more suited to short-term needs.
Lombard loans: for which profile?
Lombard loans are aimed more at investors and those experienced in the financial markets. They are more appropriate if you are comfortable with market fluctuations and understand the associated risks.
The choice between a mortgage and a Lombard loan depends on your needs, your financial goals and your borrowing profile. Each has its advantages and disadvantages: ask for advice from the experts at the private bank Piguet Galland. We're at your side every step of the way when it comes to financing. Our commitment: to accompany you on the project of a lifetime.
