Forward Sales: Should I pay deposit with my own equity or use mortgage?

Real Estate
1

Hello guys,

I’ve been reading the forum for quite some time and I must say this is so interesting to read all your discussions. Now, I just open this website instinctively as soon as I have some free time, just like I would open a news app or a game not to get bored. Thanks a lot for all the knowledge shared, very useful.

Here is the context: I’m about to buy a proprety for the price of 760’000.-. This is a new construction, starting in Q2 2023 and delivered in Q1 2025. The sales will be done through a Forward Sales.

My equity is split as followed:
Cash: 100’000
3A: 40’000
2A: 60’000

I went to see my Bank and they said the financing is fine for them. I’m in contact with other banks to see what they have to offer in comparison.

As this will be a forward sales, I will have to pay 20% (152k) at the contract signature (+ the 4-5% (38k) of notary fees) and 80% (608k) when receiving the keys.

In order to pay for both the 20% deposit + 5% notary fees (190k), I will not have the necessary cash for it, threfore I would need to withdraw my 3A+2A.

My bank is saying that they could grant me a first instalment of 100k (they cannot give lower than 100k per instalment) to help pay for the deposit+notary fees, which would allow me not to withdraw my 2A.

My question is, is it better (and possible) to pay the first 20%+notary with my own cash/3A/2A (can I withdraw my 2A like that?), so I avoid having to pay interest on a first instalment during 1.5years and then ask for the mortage only at the end of the construction? Or would it be more interesting to take the instalment for tax purposes or any other reasons?

Thanks in advance for your feedback!

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The answer I think is obvious if you compare how much you earn with your second pillar and how much you pay for the mortgage. Calculate in tax deductions if you pay for the mortgage.

Check details of your pension fund and in particular what is the minimum interest they pay and what they have paid for the years that were very good for stocks (2019, 2021). You can consider this income tax free, in principle there is a tax for withdrawing these money later, but it is difficult to factor in and you want to withdraw your 2nd pillar in few years anyway, so should not be a big thing.

Even without knowing details of your situation, my guess is that you will pay more for the mortgage than you earn with the second pillar, because the bank also wants to earn money.

PS. Don’t forget to consider insurances coming with the second pillar, how important are they for you and how your coverage is going to change if you withdraw some money.

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The first question should be: Will my pension fund allow a withdrawal in the early stages of construction? Or even before that when signing the contract.

In my experience most pension funds are rather restrictive.

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4

Thanks Dr.PI for your feedback. Actually, as I will have to only pay the remaining 80% in 1.5years, I will be able to keep saving during this time and therefore increase my equity and I should have no need to use my 2A.

Good point, this is something I have to look at more into details. I must say I’m not fully aware of all the conditions and impact related to a withdrawal

You are right, I should check if they allow that to see if this is a possibility, otherwise the solution is quite clear, I will have to use the first instalment.

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5

Depending on your goals and the target assets allocation, you might actually want to use this once in a lifetime opportunity to cash out your second pillar in advance of the regular term.

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I called my Pension Fund, and you were actually right @Cortana , they didn’t allow any withdrawal as they said the duration of this Forward Sales is too long, nothing was yet started/built and as the transfer of property is done only at the end of the process, the risk is too high for the Pension Fund. If I requested the funds near the end of the process, this would be fine for them, but not at this early stage.

Now I’m checking with the counterparty to be able to pay 15-18% instead of 20% at the contract signature and delay for a few months the 2-5% missing, hoping they would agree with this solution.

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7

As expected. Good luck!

In my experience they will insist on those 20%.

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8

Yes indeed they need the funds as the promoter is most likely getting a loan from a bank to finance the project and they need some equity as collateral for the bank.

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9

You can ask the bank, if they accept a promise of payment from the pension fund.

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10

So with bonus payment coming this month, I will be able to gather the 20% without any outside help, which is a good news. But now I’m wondering…

I didn’t pay anything to my 3A yet this year. Is there any point on doing a full 2023 yearly deposit on my 3A this month and then withdraw everything in a month or so in order to use it for the 20% deposit? Would it make sense on a tax point of view or as I will anyway withdraw it it will neutralize the tax advantages?

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In your situation I would probably start by withdrawing 2nd pillar, which has a lower expected return and you can’t really control it.

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I checked with my Pension Fund and at this stage I can’t, they don’t allow withdrawal to deposit the 20% on Forward Sales. Only at the end of the process I could use it if necessary.

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13

Yes, would totally do it.

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