Mortgage Strategy for Construction + Indirect vs Direct - Advice Needed

Real Estate
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I. Strategy for Flipping Construction into Mortgage

My wife and I have a construction that is due for completion end of April. We currently have a construction loan with UBS at 3.5%.

I just spoke to a broker from Comparis who told me that no bank will offer me a mortgage at this point because we are in a construction phase. (or they offer with a higher rate as penalty). I don’t think this is completely true because we are discussing with BCGE at the moment… maybe just an issue for a broker.

So my strategy is this:

  1. Ask UBS to flip me over to a SARON that has a 3-month term, already saving me the difference between the construction interest and UBS Saron. I know UBS is not even close to competitive with their margins so my goal is to leave them as soon as possible.
  2. The moment the key is in my hand, I then start the real mortgage shopping process with a broker or directly with other banks.
  3. Sign try to sign for a margin rate around 0.6%.

Does anyone see any problems or issues with this?

II. The next question is Direct or Indirect Amortisation.

here are my 15 year simulations:

Cost of home 997’000.00 CHF
15 Year Amortisation Target 664’660.02 CHF
Cash deposited 216’000.00 CHF
Mortgage 781’000.00 CHF
Total to Amortise 116’339.98 CHF
Average Mortgage rate 1.50%
Average Market Returns 5.00%
Average Tax Rate 30.00%
Direct Amortisation Indirect Amortisation
Total to amortise 116’339.98 CHF 116’339.98 CHF
Amortised into the mortgage directly 7’756.00 CHF - CHF
Amortised per year into a non-invested 3a - CHF 7’756.00 CHF
Amount going to our own invested 3a (VIAC) 14’000.00 CHF 6’244.00 CHF
Extra monthly going to Degiro - CHF 7’756.00 CHF
Total interest paid for mortage 163’509.30 CHF 175’725.00 CHF
Tax savings from interest deduction 49’052.79 CHF 52’717.50 CHF
Extra yeild from invested 3a (where we want VIAC) +5% 92’099.89 CHF 41’076.56 CHF
Degiro profit at 5% - CHF 51’023.33 CHF
Total Cost 22’356.62 CHF 30’907.61 CHF

I know there is a lot of factors not included here that could differ over 15 years. (changing tax rates etc).

No matter what I do to change the market returns, tax rate, or mortgage rate, direct always seems to win.

For me, Indirect seems to only help in the scenario of people who do not methodically max out 3rd pillar anyway. For people who max 3a regardless - the interest deduction from tax savings of indirect doesn’t seem to compete with the interest cost reductions of direct. If I manage to find a provider that lets me invest the indirect amortisation into the market for 5% then only in that scenario, it wins - at whatever the difference between the market and the mortgage rate is.

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I think where you can have the difference is that in case of indirect amortization you can have all 14K contribution to 3a invested (for example, if you take mortgage from VIAC) where return can be a bit less than 5% but still higher than interest rate.

the bigger difference between 3a return and interest rate the bigger will be the profit, of course there is a risk as well for the case when market under performs and you need to add extra to cover the expected amount for amortization

one extra thing is that with indirect amortization your wealth tax should be a bit smaller

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Thanks noname - yeh that is what I’m hoping for but I know many 3a indirect providers dont have an investment product for the 3a - at least not to the level of choice VAIC does.

I’m hoping wealth tax wont be a concern for many years since the value of the mortgage debt cancels out the value of all my assets.

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@Azra247 I had a couple of questions if you don’t mind, especially regarding the consolidation.

It’s not clear to me at which point you can start shopping around for the mortgage. Did you have to wait until the construction was finished in the end, or did you manage to get something (like via BCGE as you hinted) a bit before?
Your plan was to have SARON for a short term with UBS, and I was wondering whether it is possible to skip this step since I assume you pay fees to start this short SARON mortgage.
Or was this flip to SARON included from the start with the construction loan?

I’m still waiting for the building permit, but I was talking yesterday with BCV, and they offered either the construction loan only, or the construction loan + 5/8/10y fixed bundled. But not with SARON afterwards. If I don’t take the bundle (which I dont intend to, since the rates looked pretty bad at 1.91% for 10y), and I can’t take a mortgage before the construction is actually finished, then I am not sure how it is supposed to work. I’ll ask them, but feedback is welcome. :slight_smile:

Also more generally, for everyone, they offered 3.15% for the construction loan. Any idea if this is decent, or what to try to aim for? I haven’t cross-shopped yet, as without the permit banks aren’t really interested yet, but having some idea of what I should aim for would be nice. I haven’t found sites like hypotheke.ch for construction loans.

Thanks!

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@Ilixio So in the end it turned out quite different. Comparis were not telling the whole truth when they said you have to wait until the construction is over to shop for a mortgage. That is only true for using a broker like them. If you talk with banks directly they can sign a mortgage offer with you in advance that will activate the moment the construction is over. That is what we did and signed 0.68% margin with BCV for a full saron earlier this year. Then a couple of months later it activated and they took over from UBS.

The purpose of having a short minimum period of saron with UBS was that as the construction loan provider they were the only bank willing to give a mortgage before the construction was over - saving me the difference between Saron and construction interest. BUT - this didn’t work because UBS refused to offer a saron only product. They force you to take a part as a 5 year fix at least - locking you in as a customer at their awful rates for all that time. All of this while their newletter is telling you that the market favours SARON and that there is an anticipated 3 rate drops this year. Frankly, if this was the U.K. they would be in court for mis-selling financial products.

3.15 sounds high to me given the ongoing rate drops.

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in the end did you go for direct or indirect amortization?
I am assuming direct since you went with BCV?

and with the rates low did you not consider locking in for 10 years at about 1.5%

I am shopping for mortgages for my apartment that will be delivered in Q2 - 2025 so any pointers are welcome (I am also in VD and bank with BCV).

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@lsnguy Direct all the way. It wins if you are maxing 3a regardless (and have cashflow to both pay direct + max 3a contributions).

Never in a million years would I lock anything this year but that is my own personal delusion. The rates are in downward trend not just in Switzerland but in EU and US. US fed is being predicted 1% drop by December! I think we will have another rate drop this year - possible a surprise further drop in response to US heavy cuts if that happens. My signal is watching how they price Saron vs fixed. If fixed is cheaper than the current saron - to me that says they want me to lock because they think it will make them more money. So I dont.

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@Azra247 yes, that is my calculation as well to go for Direct

re the rates, I still have time till next year to see how things pan out but would be tempted to lock in if I get something close to 1%

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Thanks, makes more sense to me!
Do you know roughly how early you can start contacting banks before the construction ends? 2/3 months I guess? It took a lot longer (about 2 months) to get an offer from the bank than I thought it would take, so I am a bit wary now about all the delays.

3.15 sounds high to me given the ongoing rate drops.

I’ll look around then once we have the permit. The banker was saying that rates were generally increasing/not decreasing with the rate cuts because most banks had already done their volume earlier in the year with promotions, and now they are trying to improve their margins. Which matches what I have read.

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@lsnguy me too! but only if they offer me 1% including margin :slight_smile:

@Ilixio I would start conversations maybe 3 months away from the intended key date. But I don’t know if there is any kind of limit to be honest. The bank valuation seems to operate from the cedule hypothecaire from the notary - a document you get right at the start of construction.