Buying a house - the best approach for our specific case

Real Estate
#1

Now it is my turn to ask some questions as regards the best strategy in terms of financing possible transaction on real estate market… Of course there is a question to buy or to rent, but in our case we have already decided that we want to become owners, so let’s put it aside.

We have never been so close, even though we are on the 2nd place of people being currently considered by the owner. This means that we should really start preparing, even though nothing is certain yet.

We are considering two options:

  1. Buying the house and doing some not very big refreshments.
  2. Buying the house and doing some big renovation project, before we move into it.

The 2nd option is the preferred one, but it of course depends on the money. After some first quick checks, it seems we may be fine with both buying and renovating, but it would rather mean that we reach our maximum affordability. Hence some questions from my side:

  1. Is it possible to take one mortgage for buying and then the second one for renovation?
  2. Is it possible to take those mortgages in two different places?
  3. Maybe we should rather opt from one big mortgage from the beginning? (this can be tricky as we won’t have time to work on the project beforehand due to time pressure…)
  4. What about using 2nd and 3rd pillar - can we use them in full considering that we have never paid anything in addition to the 2nd pillar and total of 2nd and 3rd pillars are less than 10% of the transaction?

That’s all for now… Thanks in advance for any remarks!

#2

We have bought a house which we renovated before moving it.

In our case we pre-discussed with the bank and we got a bigger loan to cover the renovation. This was backed by our architect’s budget. The first part of the loan was drawn to pay the purchase of the house and the remaining was drawn sporadically over the course of 1 year to pay invoices of the builders. We were giving the bank the invoices signed and checked by our architect and the bank was paying them directly.

An important thing to note is that technically our bank would finance only value adding renovation or renovation of items that have passed their useful life. This means that in theory would not finance you to fit golden faucets neither to renovate a 5 year old kitchen only because you didn’t like it. In practise though they took a pragmatic approach and instead of checking every invoice what they did was that they estimated that only 2/3rds of the renovation would be value adding. This means that the 1/3rd had to be paid via equity however instead of doing that we paid our 20% cash and to bridge the gap we have pledged our 3rd pillar (thus increasing the collateral value i.e. justifying a higher loan).
The interest we got was the same as for a normal mortgage (i.e. no more due to the renovation).

To your questions:

  1. Even though as i told you we got one loan from the beginning I understand that you can request a releverage later on to cover for renovations.
  2. I would assume no, since mortgages have rankings i.e. one bank would rank before the other one in case of foreclosure and I assume no bank would accept lending you money while being ranked second.
  3. As described this is what I did. I gave them a rough budget from my architect however I was allowed to change the specifications later on. I was actually even allowed to slightly increase the mortgage as we changed our plans and went for a bigger renovation. I am saying that you dont need to have everything super detailed and finalised before going to the bank, a basic budget (i guess from an architect) would do.
  4. We did not touch 2nd pillar but i understand you can either withdraw or pledge it similar to 3rd pillar. As I said we pledged our 3rd pillar instead of drawing it as it remains invested and hopefully will yield better returns than the interest we are paying.

In general I would recommend speaking with an architect even before buying the house to give you an estimate of the renovation costs. Have him visit the house for a better assessment. Ours did this for free on the understanding that if we bought the house we would do the renovation together. Don’t know how familiar you are with the market but renovations in CH are crazy expensive. And from what he tells you assume a 15% - 20% more.

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#3

Sure but both combined can not exceed the affordability calculation. It makes sense to directly get the full mortgage.

Unlikely the bank will want to have a proof of debt (Schuldbrief) which gets entered in the property register. And usually two banks don’t participate for the same property.

I would recommend that, you don’t have to use all the money right away. But having the proof of debt for the whole amount will make it easier for the bank to issue the whole mortgage.

Absolutely possible. As @Moustakalis mentioned I would today also recommend to pledge instead of withdraw the 3rd Pillar so you can keep investing it. (might come with restrictions tho).

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#4

Many thanks for your replies!

We are already in contact with an architect, good to know that it will be sufficient to come to the bank just with rough calculation. I was also afraid to get worse conditions for the renovation part, so thanks again for reassuring us :). Finally, we think about changing a lot (adding a floor…or changing the heating system etc.), so I guess this should come under “value adding” topic. Now the question about our affordability vs. estimated renovation costs (plus 15-20% buffer…). Might be a bit problematic :D.

#5

I have additional news about our project - it appeared that the owner has the mortgage valid until 2024 at one of the cantonal banks. If he breaks it now, the penalty would be something around 38 kCHF. Of course he is not into paying it… Hence I have additional questions:

  1. Has anyone experience with buying the house with already existing mortgage?
  2. Is keeping the same mortgage the only way to avoid the penalties? Or maybe there is any way to kind of transfer it between banks (maybe just cantonal?).
  3. In case of keeping - do we have to stay with the same conditions (interests, end date, etc.)?
  4. Would you consider just to pay those 38 kCHF more and take the mortgage elsewhere? In terms of interest the current one is 1.21%, but we were rather into blocking the rate for 10 years at least, not to go through this again in 3 years…
#6

I’m confused, which mortgage do they still have (1st/2nd)?
When looking for houses, 99% had still a mortgage on them… realistically, who pays back the full amount in Switzerland with these rates…
But none of the sellers had any issue in closing the deal, or forcing you to take over the existing with sub-par rates. They realize appreciation gains and pay out the residual value.

I could be wrong though…

P.S.: residual mortgage value?

Edit: I’ve seen you have the rate already.

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#7

For the moment I know nothing more than the mortgage is with cantonal bank, until 2024, at the rate of 1.21%. But he said that, which means it can be something else - as he changes his mind quite often… Not very easy to discuss with him.

He kept the information about these penalties, just to get those 38 kCHF more. Our mistake we haven’t asked about it before - lesson for the future ;). He is not forcing us to take over his mortgage, but if not, he just wants to increase the price. In the current market conditions, I don’t think this amount should be a deal-breaker. I just need to learn exactly what this take over would mean or if there is any other way not to pay those penalties.

#8

Best would be to directly discuss with the cantonal bank where the mortgage is currently at. I do also understand it as that you have to take over the mortgage with the same conditions or at least pay all remaining interest rate until the end of the term. However if you’re looking to go for a 10 year mortgage anyway the rates might be actually in the 1.2% range by now. Also why? I like the negotiation game and was able to save 8.5k CHF over the next 5 years by investing about 2h of my life… that’s a good hourly rate.

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#9

Sure, this is the plan - the owner is supposed to contact his advisor who should contact us afterwards. I just wanted to learn before if there is any possibility not to pay the penalty while taking the mortgage from other provider (I guess probably not…) and what should I count on changing (if anything) when taking over his current mortgage.

#10

Early repayment charges are contractual on a fix rate mortgage, you will not be able to skip them unless you are successful with negotiating with the bank. But if your plan is to switch mortgage provider I’d be surprised if they made you a gift on that lol ^^. Those penalties depend on the principal, the remaining duration and rate market conditions. Given that you can fix a rate using forward 2 years upfront you basically have two years to go before closing your next mortgage if you decide to take over the mortgage.

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#11

To be frank… I’d not negotiate too much (unless you find that mortgage is beneficial), he should have priced any penalty and liability from the start in his price.

I’m just wary he will find more of such unexpected expenses in the future. What about notary fees, etc.? I hope it’s clear.

Don’t forget you are the person putting the money, he is cashing in :slight_smile:

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#12

For notary prices common practice is to share them 50/50 between buyer and seller. Important to also take into account are tax on property gains that should also be fully paid by the seller.

Given what you describe is the seller handling the operation on his own without going through an agency ? If yes I would be ultra careful and be assisted by a professional not to miss anything.

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#13

Calculate at which rate you could make a new mortgage. Calculate how much are you overpaying till his mortgage runs out. Reduce the price of the house by that amount.

Just keep in mind that interest rates could be higher in 2024. Maybe you’ll have 2.00%+ for a 10 year mortgage by then. This could cost you ten thousands of CHF.

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#14

We are facing a similar situation now so here are some elements that could help you:
Indeed it is certainly true that the penalty is equal to the amount of the interest rates until the end of the mortgage (as the interest rates decreased since the owner took the mortgage)
UNLESS the seller buys a new primary residence within 1 year (this time frame was communicated by our bank, it is certainly negociable): in this case he can transfer the mortgage to the new property.
Once your owner sells his property, if he did not find a new primary residence (or if he did not transfer the mortgage) the 38k are immediately due to the bank.

So the owner has several options, which in my opinion depend on the law and supply demand:

  • transferring the mortgage to the new owner → if there are a lot of potential buyers, if I would be the seller would try to negotiate
  • adding this amount to the selling price (not necessarily communicating it to the buyers), but the price has to reflect market prices (however when I see the market in Zurich, I wonder what are “market prices”…)

Other factors to consider:

  • ask the owner to transparently share the mortgage interest rate + amount + exact duration corresponding to the 38k and compare to the current market conditions. Or ask the Kantonalbank directly.
  • note that if the seller does not transfer the mortgage the 38k are fully deductible from his taxable income, so if he has a high marginal rate, actually he can get up to 30-40% (?) of the 38k back from the tax office…
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#15

First of all, many thanks for great feedback!

Do I understand correctly, that you suggest:

  1. Get the mortgage from the other provider with starting date in 2 years with blocked interest rate.
  2. Take over his mortgage and close it in 2 years, paying much smaller penalty.

If it’s the case, seems interesting to consider, many thanks!

Yes, it’s crystal clear and we obviously don’t like it. If we decide to make an offer, it will be with a condition to sign fast, not to give him time to change his mind again (e.g. to include additional fees).

Really? In Vaud we are talking about around 5% of the fees in total, should I ask him to participate?

Yes, he doesn’t want to involve agency, to gain those 2-3% more… At least we have architects in the middle who help us with this. I hope it will be enough to avoid problems…

I don’t think that reducing the price will work. He already said that he has a developer interested in this house, ready to buy it immediately, he just prefers to sell it to family… Sellers’ market in its full…

#16

Oh and ask him why he is selling.
As he is selling before his mortgage is over, well I would say that is his problem/responsibility. But if he feels there are much buyers who are interested in his property, then it is worth to give a try…

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#17

Most probably true.
But he might also bluff…

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#18

You could also sign a new mortgage in the next 2 years with a 2 year forward so that in 4 years you can close the existing mortgage (without any penalty in that case) and start the new one with the rate already fixed. That being said you would still have a rate risk for the next two years instead of 4 if you just take the existing mortgage without doing anything and wait until then to take a follow up one. Your idea is also an option but you will indeed still have to pay the penalties for the last 2 years.

Forward also has a cost associated with it, it’s not free but gives you the option to fix the rate upfront. At the end it’s a matter of calculation / tradeoff between current rate conditions, penalties and how motivated you are to buy that property.

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#19

He is going back with his family to their country. However, the decision seems to be at least partially caused by closing his restaurant, which most probably happened due to Covid…

Exactly, many thanks. To start with, I have to get exact details about the current mortgage he has.

#20

Still waiting for the bank to give us the details of what can be offered to us to avoid penalties… I’m getting crazy :). However, in the meantime I got additional question.

It seems that I may change the job soon (starting from 01.07 at the earliest). I’m not sure what I should do with the bank… Considering that the new job will not be worse financially, do you think I should honestly tell the bank about it? Or rather try to finalise the mortgage before? One of the possible timelines may look as follows:

  1. March: we get agreement from the bank and sign forward sale with the date 01.07.
  2. June/July: we come back to the bank with a project for renovation.
  3. July: bank should transfer the money agreed in March when we get the keys. At the same day I start a new job…
  4. July/…: we start the renovation increasing the mortgage up to agreed limit while works are progressing.

I don’t know if the bank will ask us for example for fresh payslips or other documents just before starting the mortgage, but I imagine they could ask for it while processing renovation related request. Has anyone similar experience of taking the mortgage and changing the job in the meantime? :slight_smile:

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