Thanks everyone for sharing your perspectives. Update: my bank lowered the rate a bit today, so I fixed my mortgage rate, with the major part fixed for 8 years and the rest on SARON. Deal or no deal, wars, and all the uncertainty really got on my nerves. Whether it was the best decision or not, I’m not sure, but I’m happy that I won’t have to think about this for the next eight years, yeah!
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I’m looking for advice on how to handle the mortgage during the construction phase of my apartment in Switzerland.
Situation
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Final mortgage amount once construction is complete: approximately CHF 1.3 million.
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The bank releases funds to the developer progressively based on construction milestones.
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So far, around CHF 600,000 has been released.
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The remaining funds will be released over the next months until delivery.
Current financing setup
The bank is offering me the possibility to lock in the already released amounts now.
Current offers are approximately:
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SARON mortgage: ~0.8%
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10-year fixed mortgage: ~1.5%
At the moment, I have only consolidated CHF 150,000 under a SARON mortgage.
Key point
If I do not consolidate the released amounts, they remain under the construction loan. The construction interest rate is approximately 2.5%, but these interest costs are capitalized into the project financing, so I do not have to pay them out of pocket today.
If I consolidate into a SARON or fixed mortgage, I benefit from a lower interest rate, but I must start paying interest immediately.
My question
What would you do in my situation?
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Continue consolidating released amounts under SARON as construction progresses?
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Lock in released amounts now at around 1.5% for 10 years?
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Wait until delivery (October 2027) and consolidate the full CHF 1.3 million mortgage at that time?
I’m particularly interested in how you would think about the trade-off between:
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Lower interest rates now
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Preserving cash flow during construction
Any experience with similar new-build financing structures would be appreciated.
Thank you!
Disclaimer: I would not have contracted a 1.3M construction credit on an appartment under construction with a planned delivery 1+ years away unless my wealth was over the lower 8 digits so my feedback may not be relevant to you: we have way different wealth levels or/and we think differently.
The first thing I would anticipate is that the appartment may not actually be ready for October 2027 so I wouldn’t take any decision that could make me very uncomfortable if the delivery date is not met.
Second, I would try to avoid having tranches that don’t renew at compatible times. If fixing part of the mortgage now, I would make sure there is some overlap with the future renewal dates of all the tranches, including future ones.
I would not frame my decision as a cashflow one unless I am currently short on cashflow, in which case, increasing it by other means would be my first order of business (easiest would probably be to reduce expenses but increasing income is usually a more qualitative one).
I would try to plan for the longer term and see what can cause me trouble in my potential financial situation. What is the maximal rate on the full 1.3M mortgage that you could comfortabl-ish-y handle? If there is an upper bound, I would fix with a fixed rate before reaching it.
Otherwise, it looks to me like a total returns/total costs type of decision. The difference between a fixed 1.5% and the 2.5% rate on the 450K you could fix if I understand things correctly is roughly 7K for 1.5 years until the construction would presumably be finished. Fixing now as a SARON mortgage would probably yield a bit more but carries also the risk of much higher rates (inflation is currently up, the SNB could increase its taget rate in the future).
I think I would personally try to fix what I can now while making sure I can have overlapping renewal dates later on so:
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Either fix only the part I think I would amortize at the end of the mortgage, for example using 2nd pillar funds, which can be unlocked every 5 years, provided this will be your main home.
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Or make sure I can get access to mortgages with a term of [date when I fix part of the construction credit -1 year] so that both can end at the same time and allow shopping for rates at renewal.
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I’m in a similar situation right now, except I would like to go SARON, and UBS (my bank for the construction loan) is only giving me a 1.15% margin if I consolidate now, which is garbage.
If you’re keen on going fixed-rate, I believe the 1.5% for 10 year is pretty decent these days, and I would say there’s no reason to wait. You are unlikely to get much better, but take a lot of risks waiting.
Likewise, the 0.8% SARON rate is ok (although you might be able to get a bit better elsewhere right now), and waiting 1+ year paying 2.5% will erase any gains you might have by waiting for a 0.6/0.7% margin SARON.
If it’s like UBS, you have a 13 months notice for the SARON mortgage, so you can still terminate it later and come out ahead. 13 months after construction is ended at a +~0.2%p over baseline is still way better than 13 months at +~1.9% during the construction itself!
Preserving cash flow during construction
Unless you have cash-flow issues, I don’t really see the point.
I mean, you can try to do the maths, especially regarding opportunity costs, but the timeframe here is too short for me to confidently invest the difference in stocks and hope to come out ahead.
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Why not? I don’t really see how it is fundamentally different than buying an existing home. Yes it’s a bit more risky in that the final cost might change a bit, but we’re talking maybe 10-20% worse case. If you have a low 6-digit sum aside just in case, you’re safe. That’s a 100x order of magnitude difference from your comfort zone.
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Thank you,
I’m debating wether I should secure 600k at 1.5 now for 10 years and just leave the rest on Saron..
I’m not particularly tight on cash flow, but it does add up to pay rent plus 1.5% on the 600k.
The other issue is that it would tie me in with the current bank for 10y, instead of being able to shop around for better rates once the project is completed. Unlike UBS I don’t have any waiting period, one the project is completed I can take my mortgage anywhere else, if saron it’s just 3 months.
There is a chance the construction compny goes bankrupt/runs out of capital and if they’re selling homes early (possibly at a discount), said chance isn’t that low.
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Have you tried shopping around a bit to see what the delta would be with your current offer? Banks of course won’t commit to anything in 12+ months, but you should be able to get current rates and compare to your bank’s current rates.
I don’t know your situation, but on the surface it doesn’t feel it’s going to be a huge difference.
If I was in your situation, I would say the only thing that doesn’t make sense to me is not to consolidate.
Either you’re fine with the risk taking and go all in SARON and keep it long term (potentially shopping around for better SARON terms later), or you want to play it safe and take the 10 y. If you want to go fixed to reduce risks, gambling on the rates in 1+y feels opposite to that goal.
You can go mixed, but it’s going to lock you into your current bank for 10y for both the fixed and SARON part. Only make sense to me if you want flexibility in reducing the mortgage later down the road.
I’m not particularly tight on cash flow, but it does add up to pay rent plus 1.5% on the 600k.
What would you do with this extra cash flow, and is it better than not paying 2.5% interest?
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I keep investing in my VT portfolio on IB, if I had to pay the mortgage now it would reduce my monthly contribution. I currently invest around 3k a month.
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The cost uncertainty matters and as @Akia has pointed out, costs can skyrocket if the contractor does shady business. but it’s more the delay I’m worried on.
Buying an existing ready to live in home, I know when I can move in with certainty and I have mastery of my costs. No paying rent during construction and the total amount of my mortgage would be known.
It’s just too many uncertainties for me to be worth the cost. I could do it for less money, hence I could envision myself doing it if I was way more wealthy, but I wouldn’t want to deal with any of its hassles if it had any real impact on my financial life.
I’d also be wary of a 1.3M mortgage in the first place and question if I really need that much house but prices differ by region and wealth levels can justify it.
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CHF swaps seem to have fallen to the lowest levels since the beginning of war on reason terrorism Iran.
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What would be the best place to observe these? I have a mortgage at BCV, so I was looking on their website to check the current, official offerings… But they kind of disappeared recently (at least I cannot find it anymore).
ZKB
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Very interesting post — I’m learning a lot about mortgages because I had no idea about any of this.
I’ll explain my case:
Buying a 1,000,000 apartment, couple aged 44 with 1 child. Gross annual income: 180k.
I have the following assets:
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280k in the bank, not invested
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2nd pillar LPP: 189k
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My wife’s vested benefits account: 50k
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3rd pillar via VIAC + finpension: 150k
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Other investments: ETF + real estate: 150k
My questions are:
Would it make sense, for example, to contribute only 20%(200.000) upfront in order to keep more debt until 2029 (I think it may not be possible to deduct it from taxes), and then use the 2nd pillar to reduce the debt?
Would it be better to go with SARON now and, if rates rise a lot in the next few years, make a partial amortization with my 2nd pillar (189k currently yielding 2.5%)? I understand that with SARON there is no penalty for partial repayment with VIAC… I need to ask about that.
Or maybe it’s a better idea to put down 350k initially (so there is no second mortgage) and take a 10-year fixed rate with VIAC at 1.60% and limit all risk.
I’m thinking it through, but of course nobody knows the future.
Keep the debt and invest the surplus, depending on your risk appetite, go with SARON or go with a 10 or 20y mortgasge.
The tax deductible on debt is imho almost irrelevant, it’s at least not a huge reason to pay back a debt that has only like 1.5% interest. Comgrats on the income and wealth though 
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That’s my backup plan. No point to use 2.5%-yielding pension money and pay small withdrawal tax now in order to save 1.x% mortgage interest (less taxes until probably 2031/32). Further, leaves you the option for buy-ins instead of amortizing once you decide to do so.
Especially if you get the same mortgage conditions with 80% vs. 65% mortgage.
To invest elsewhere with more risks vs. less debt, or SARON vs. fixed is up to you, as Akia already wrote.
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Congratulations on being in a very good position to buy a 1m CHF property. You have many options and levers to pull. But the first question is how comfortable / averse are you to have a big mortgage.
- Some like maximum possible mortgage to have most of free assets invested in equites and other assets. Some prefer to put down x % (20-30) with clear path to reach 33-35% over next few years or even more (40-50%) paid off.
- Some like security of fixed term of 8-10 years and sleep well. While some prefer SARON knowing fully well that rates can rise very quickly but assume that over the 15-25 years they will pay less with SARON.
Now on particular things on your numbers:
- VIAC/WIR will consider your pillar 3a (fully invested) at 60% face value. ~ 90K CHF
- VIAC/WIR will consider your wife’s vested benefits (fully invested) at 60% face value. ~ 30K CHF
- I don’t know what face value is Pillar 2 / LPP is taken at but assuming 80-90% ~ 150-170K CHF
UNDERLYING ASSUMPTION: Over long (10/15+ year) term, return on equity (or invested pillar 3a or vested benefits) > return in pillar 2 > keeping cash.
Irrespective of which of the following options you like, consider keeping enough cash for ~12 months expenses. Helps you sleep well.
OPTION 1: If you want MAXIMUM LEVERAGE and want to invest the left-over cash after buying the property.
Pledging of Pillar 2 + Vested Benefits: 180-200K = 18-20%
Pledging of Pillar 3a: 90K = 9%
NOTE: You don’t have to amortize the pledged Pillar 3a (true for all 6-7 banks I talked to). But WIR even told me that I do not need to amortize the pledged pillar 2/LPP and vested benefits.
With your numbers, you can pay 1% cash, pledge pillar 3a (9%), and pledge Pillar 2 + vested Benefits (~20%). You will be asked to amortize 5% over next 15 years → use pillar 3a indirect amortization.
What to do with 280K cash? Invest in marketwise ETFs. But if you are not comfortable with that level of risk and you are in high margin tax (depending on canton), use some of it to buy into Pillar 2. Save on the income tax and get the return there (hopefully more than the 1.6% of so mortgage rate that you pay)
OPTION 2: If you want very LOW LEVERAGE
You have 280K cash (28%).
With 9% from pledged pillar 3a and 24-25% cash you are already at 33-34%. Now you have 9% second mortgage but you don’t need to amortize (any bank). Over time property increases in value and your loan to value goes below 66% by itself.
OPTION 3a: Something in-between, use
Cash: 11%
Pillar 3a (Pledged): 9%
Amortize 1-1.5% (of 1m CHF) per year with pillar 3a / cash to gradually reduce mortgage
Keep pillar 2 and vested benefits UN-pledged
OPTION 3b: Something in-between, use
Cash: 1%
Pillar 3a (Pledged): 9%
Amortize 2.1-2.2% (of 1m CHF) per year with pillar 3a / cash to gradually reduce mortgage
Pledge pillar 2, Keep vested benefits UN-pledged
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Think holistically - what is your cash buffer / emergency fund, what are your investments, pension savings, etc.
Don’t let the tax tail wag the investment dog.
I have an emergency fund of 50k (which is part of the 280k not invested). We contribute the maximum each year to a 3a pillar with Viac/Finpension.
In addition, I have 100k in real estate ETFs.
Then around 100k (today’s price) in BTC, USDT, ETH. But I don’t count this capital as it’s very volatile.
My idea isn’t to condition the investment, but to reduce debt; however, if I can deduct something more until 2029, that would be welcome.
That said… the remaining cash should be invested at low risk to at least get something more than 1.5%.
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