Hi All, I would appreciate your great input before going to the “professionals” on Bahnhofstrasse
So, we decided to buy a property to live in, mainly because:
Our income and assets increased in the last 3 years and we want to re-allocating our portfolio a bit towards CH.
It seems like doing aggressive 2nd pillar buy-ins and owning a property offers more room for tax deductions.
Data points:
- Yearly Salary for affordability: ~ CHF 400k - Marginal tax rate: >30% - To reduce the tax burden, I doing aggressive buy-ins - New money is allocated to 8% yield long-term investments - Property budget: CHF 2M (+ 0.5M for renovation) or CHF 2.5M (new development on paper) - The mortgage will probably be long-term fixed
Available Assets:
- CHF 250k: Hard cash for the property - CHF 300k: 2nd pillar (~1.5% yield, locked in until January 2028) - CHF 50k: 3rd pillar (8% yield) - CHF 500k: IB (8% yield) - CHF 1M: (Real estate/Alternative outside CH - 5% yield, not liquid)
The goal is to use pledging for the 2nd pillar (as I can’t withdraw it), to reduce the need for a large cash down payment and maximize the mortgage.
How would you allocate the down payment considering this?
If the data points remain the same for the next 5 years, and considering that the break-even (tax/yield) point between buy-in and not is ~5 years, would (How) you proceed with the 2nd pillar buy-in / withdrawals?
I believe that my limitation to reduce the downpayment is my income, which is quite high, but not enough (as the equity from my company is considered 50% income) - what do you suggest?
First: Wrong reasons to buy a property. Tax optimisation doesn’t require it (you are already optimizing through 2nd pillar buy-ins), and neither does asset allocation to CH (buy the SPI or a CH RE fund instead).
Answers to your questions:
Downpayment (for a CHF 2.5 million home): Best case you can finance a mortgage of CHF 2 million, if that is CHF 400k net income, fully to be considered. So, you’ll need all your cash, your 3rd pillar, and at least half of your IBKR investments for the downpayment. I reckon you’ll have to pledge your 2nd pillar too, even though it doesn’t help directly in this case as you can’t finance more than about CHF 2 million anyway.
2nd pillar buy-ins: Assuming this works out, I’d aim to reduce the new mortgage to about CHF 1.5 million first, before continuing 2nd pillar buy-ins. Once buy-ins are exhausted wait another three years before pulling it all out to payback the mortgage (on that timetable you should fix your mortgage, I’d guess about 10 years).
It’s not necessarily your income, it’s that you have spread-out your investments and want to kinda keep it that way, while trying to get a mortgage the size of your net worth. You are overextending yourself IMO.
Questions to you:
You claim to have a budget of CHF 2.5 million? That’s just your desired budget, or how did you arrive at that figure based on everything else?
You mention long-term 8% yield investments multiple times. That is just global equities and reflects your return expectation, correct?
You mention that “equity from my company is considered 50% income”. Please elaborate what you mean by that (bonus RSUs from your employer, are you self-employed, something else).
Yearly salary of 400k: Is that actual, net earned income, or is that including “equity from my company” from above? What about other income (foreign RE) and other debt?
Our break-even point for the tax/yield of 2nd pillar buy-ins is ~5 years; however, we are more than 20 years away from accessing the 2nd pillar (unless we purchase a property).
Initial estimation based on our future needs, market conditions, and available assets. We are okay with re-evaluating this if it doesn’t make financial sense.
Right.
The RSUs from my employer are counted as 50% towards affordability.
Our actual salary/income is higher, but most banks will use CHF 400k for affordability calculations.
Questions:
1.Is there a way that the pledge can help to reduce the down payment?
2. Can you please elaborate on the idea behind this strategy?
Since we are not in a hurry to buy a house, from a financial standpoint, which option is more advantageous: buying a house now that needs renovation, or buying a house that will be ready in 3 years (Discount on the market price and then being able to use the 3rd pillar also for the down payment)?
FWIW, it’s still not quite clear what your motivation is for this.
Putting more than half of your current wealth into a single property in Switzerland would not be very diversified, and it likely wouldn’t yield close to 8%. Is the idea that you want to lower your risk/diversify?
(but if so why not just put stuff in pillar 2? also how likely is your employer to start offering a 1e, in which case you’d be able to invest similarly in world equities in your pillar as you would do outside of it)
edit: I think historical real returns are closer to 5-6% for equity, given the low inflation regime in the past decades, 8% might be a tad too optimistic.
The initiate 2024 thought was putting CHF 250k into CH real estate and to get ~4%.
But 2024 and 2025 are expected to have very high income with a marginal tax rate of 35% (I don’t have the exact numbers yet).
That’s the reason I need to do 2nd pillar buy-ins (300k) and overload it later to a property. Overall, the plan should support the home bias, tax optimizations and diversification.
The main question here was always how to reduce the down payment and leverage the low interest rate offers available these days for fixed rates.
Am I on the right track?
After 5 years, it doesn’t make sense financially (low yield compared to alternatives).
Renovations in regards to energy efficiency are often subsidized on a cantonal level and sometimes municipal level. Those can count as hard funds and help you reach affordability for the asset you are aiming for.
Some renovation costs (usually value maintenance and energy efficiency costs), but not all, can be deducted from taxes. It may vary by canton and it may change in the future as a change of law in regards to the taxation of the rental value, with implications for other deductions, should be sumbitted to vote by the population in the future:
[FR]: Imposition de la propriété du logement
[DE]: Wohneigentumsbesteuerung
[IT]: Imposizione della proprietà abitativa
Of course, there are many non-financial aspects to also take into consideration when it comes to renovating vs buying new. I’m assuming you are weighting them separately.
I’m no expert but if you pledge the 2p you still need to borrow against it on the mortgage no?
For example for your 2.5m property if you did
250k (10%) downpayment with your cash
250k as a pledge from 2nd pillar to reach 20% mandatory threshold
2.25m (90%) would still need to be borrowed from the bank as a mortgage
Since you already have 300k in your 2nd pillar, doing more buybacks won’t save you anything on the property purchase here? It will still just save you taxes now but be locked up for 1.5% yield for the next 20+ years.
(Half was a very fuzzy number, sorry. But in the end you’ll have negative 2M(?) bonds, 2.5M real estate and the rest, seems very RE heavy)
Do you have the detail on how you came up with 4%?
(Also keep in mind that primary residence is mostly self consumption, you don’t get a cash flow to reinvest/compound, just get to pay rent to yourself)
That’s what I’m also trying to understand: how a pledge can help me if the money isn’t available to withdraw.
This is also something I’m trying to understand.
On the one hand, any new buy-ins won’t help me with buying the property, and the money will remain locked for three 3 after each buy-in.
On the other hand, I get 35% tax reduction, a 1.5% fixed tax-free return and might only pay 1.2% for the interest (which I can deduct).
Also, I can accumulate money in the 2nd pillar and then pay for the amortization (with withdrawal tax) if that make sense.
But these are the exact questions I would like to verify.
What I’m doing right now is taking a seed of a plan, evolving it with this forum, and validating it later with mortgage/pension/real esate experts who can see all my up-to-date information and consider all the variables, which I’m now trying to simplify to make it much easier to get input.
Not at CHF 2.5 million. If you want to minimize your downpayment, pledge your 2nd pillar for 10% of required equity, and provide only the other 10% in hard cash (or 3rd pillar). The roughly CHF 2 million you can finance with your CHF 400k income then equals 90%, so you can buy something for about CHF 2.2 million with just CHF 250k actual downpayment. Anything above that increases your downpayment.
@nabalzbhf is correct. What do you think your exposure to the Swiss RE market is once you buy a property for CHF 2.5 million? Are you mistakenly only considering your downpayment as market exposure?
In general, your plan can work: Buy heavily into 2nd pillar to save tax, buy a property with a big mortgage, eventually use that 2nd pillar to repay the mortgage at advantageous tax rates*/**
But I also still struggle with your logic. I mean at your (unrealistically high) return expectations, living in a CHF 2.5 million house has enormous opportunity cost, even if you consider that this also provides access to very cheap long-term debt. If you want to live in such a house this absolutely may make sense, but not with the predominant view of tax and return optimization.
So, if you are sure that you eventually buy such a house, continue to buy into 2nd pillar and look for your dream property. If you want to maximize your return (at your assumptions), stop buying into 2nd pillar and pay your taxes.
*Little footnote: Planning to begin with to use your buy-ins to repay a mortgage shortly thereafter could constitute illegal tax evasion. You generally are fine if you uphold the three-year lock-up, but don’t share this entire plan in detail IRL.
**There are currently some potentially major changes proposed to this preferential taxation.
Thank you, I now understand your point that the exposure is changing significantly.
We do want exposure to the real estate market where we live, as we have decided to reside here for at least the next 10 years.
However, I understand that the entire debt is exposed, not just the down payment, and I will need to validate my asset allocation.
Let’s set aside the asset allocation for now and focus solely on the financial aspects.
Considering the following:
CHF 250k (10%) down payment from hard cash
CHF 250k (10%) pledge from the 2nd pillar (Will it also be possible with the 3-year lock-in)
A CHF 400k income for affordability
Which allows for a property purchase of up to CHF 2.2M
Finding a house where the interest, maintenance, and ancillary costs are less than our current rent, isn’t a good decision?.
Now, regarding the 2nd pillar, you mention:
This makes sense, but could you please elaborate on the advantages of this strategy?
Another strategy could be to do buy-ins over the next 7 years and perhaps time the payback close to the mortgage renewal.
Out of curiosity, what’s the current rent and your estimate for your costs (I think generally it’s 1% for new build)? (don’t forget Eigenmietwert btw). For a quick estimate it sounds like something like an estimated 3k per month between mortgage and maintenance?
I think this is missing the opportunity cost on the downpayment (20k per year with the optimistic 8% estimate).
Edit: @FIRE4Messi : after a quick websearch, it seems that I am wrong. Please ignore what I wrote before editing it out (I’ve mixed a few things when I’ve written my former reply).
If true you are correct, this would be beneficial. But is it true on a long-term cost basis (not just on a monthly cash flow view)? Quick math (including your high equity cost) tells me that for this to be correct you would have to currently pay about 6k per month in rent and ancillary.
It’s just what I would do from a risk management perspective, and I believe you conclude something similar in your next sentence. Just make a basic plan, and that could be:
Buy the property with a fixed 10-year mortgage
Use savings in year 1 and 2 after to reduce your LTV to a manageable level (paying back your 2nd mortgage)
Freely invest savings of year 3 to 5ish
Use savings to fully maximize buy-in potential of 2nd pillar in years 5 to 7ish (and finish of course in time for 3 year lock-up)
Again freely invest savings of year 7ish to 10
Use full 2nd pillar to repay mortgage and refinance the rest
We pay CHF 5300 (CHF 4800 rent and ~CHF 500 for Nebenkosten/basic ancillary, including electricity and water).
But, we believe we are renting below market price, estimating the rent for similar property to be around CHF 6000
Anyone can tell what the usual maintenance and additional costs are for homeowners? Not the absolute cost, but just what these services are. Is it really 1% for unrecoverable expenses? Is it including renovation?
Are any of these things included?
Heating, hot and cold water, building and grounds maintenance (like caretaker services, stairwell cleaning, and garden upkeep), cable TV/antenna fees, building and elevator electricity, wastewater fees, garbage collection. and administration costs.
Allocating to CH assets IS more tax efficient. From the perspective on how they are taxed.
On stocks for example no withholding tax whatsoever (you‘ll always lose a range of taxes with assets outside CH, even for US stocks, at minimum due to the 0.3% management costs deductions, you are not awarded the full da-1) and 10% of the dividends come as tax free capital gain.
At current dividend yields, just from pure tax perspective US stocks are probably better yes. But that‘s a snapshot right now. That may change.
Every ex-US stocks are certainly way worse though.
Then there are other things like direct ownership real estate funds, like DRPF, that are tax exempt.
On other real estate state side I‘m not too familiar, but I think there are as well.
The construction industry and the banks usually use 1%, but I’ve read that it’s more around 1,5% or slightly more. The reason for the lower value lies with conflicts of interest.
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