Which Mortgage Option is Best? Seeking Your Expert Opinions

Real Estate
1

Hello everyone,

I’m excited to join this forum, which is full of valuable advice and insights from experienced members. As a first-time poster, I’m looking forward to your guidance on a mortgage strategy for a property I’m considering.

Scenario 1:

• Selling Price: 1,245,000 CHF

• Bank Coverage: Up to 1,240,000 CHF

• Mortgage Rate: 1.19% for 10 years (single tranche)

Scenario 2:

• Selling Price: 1,245,000 CHF

• Bank Coverage: Full amount plus an additional 35,000 CHF for renovation

• Mortgage Rate: 1.31% for 10 years (single tranche)

• Renovation Needs: Minor changes in the kitchen and bathroom, estimated at 10,000 CHF (the renovation amount can be used for other purposes as well)

Would it be make sense to take the additional renovation money, which is more than I need, and use it for other purposes but pay more monthly interest? Or should I choose the first option to pay less monthly interest and stick to a budget renovation?

Both options have their own pros and cons. I would greatly appreciate your opinions and advice on which scenario might be more advantageous in the long run.

Thank you in advance for your help!

2

Why pay a lot more in interest each year for money you don’t need?

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3

In the first scenario you are paying 1,240,000 * 0.0119 = 14756 CHF of interest per year, in the second scenario 1,280,000 * 0.0131 = 16768 CHF

The only difference (as far as we know) between them is that you can have 40k of the loaned money more, so the question is effectively if whether you want to borrow 40k CHF at the rate of (16768-14756)/40000 = 5%

That is so high that you should do it only if you are desperate to have 40k loan and you don’t have another better way or getting that loan.

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4

sorry to ask a question that doesn’t help answering the original post.

How can the mortgage be so high? I thought it can be only as high as 80% of the selling price.

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5

Since he only wants to borrow 10k for renovation, he’s effectively paying 20% interest for that 10k.

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6

Absolutely not. You are paying more on the whole amount, not on the extra part.

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7

Technically you can loan up to 80% of the valuation, up to 90% if you pledge pillar 2/3. If according to your bank you pay too much (happens regularly) your loan ratio/LTV will be lower; if you pay too little (extremely rare) your LTV might be >100%.

@yolgezer_4376‘s banks apparently value the property somewhere between CHF 1.4 and 1.6 million (based on the little info given), so this transaction is significantly below market value, suggesting this is between related parties (e.g. you buy from your parents).

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8

Indeed. luckily we don’t need the renovation amount desperately.

9

Thank you for the input. There is no special relationship between the parties. Option 1 bank evaluated the flat at 1,240,000 CHF, and Option 2 bank evaluated it at 1,280,000 CHF.

10

Then I don’t get how you can get 100% mortgage.

11

Ahh, I got your point.

No, the second bank covers the full 20% of the mortgage and lends an additional 35k CHF for renovation. Option 1 bank covers up to 1,240,000 CHF (the selling price is 1,245,000 CHF), so I need to bring an additional 5k CHF from my end.

12

But still, how can you get to >90% loan-to-value ratio?
Option 1 is a Ratio of 99.6% (5k/1245k). :exploding_head:

AFAIK standard is 80%, but max. is 90%? (Link to Moneyland)
image

13

The 1,240,000 CHF is the bank’s evaluation of the flat. I need to bring 20% of that amount, which is 248,000 CHF, plus an additional 5,000 CHF since the bank’s evaluation is less than the selling price.

14

But then the bank coverage is not 1,240,000 but 992,000 (which is the actual mortgage).
So you have to adapt all the calculations from the other forum members above to your actual mortgage amount. Of course you will not pay interest to the bank on the part you bring in yourself.

E.g you have to adapt this calculation to get the final picture:

The same holds for your scenario 2. Bank coverage is not “Full amount plus” but if I understand you correctly it is 992,000+35,000 = 1027000.

So you either get a loan/mortgage of 992,000 for 1.19% or one for 1,027,000 for 1.31%. From that perspective the better option is obvious, or did I miss something?

EDIT: If you calculate it through, you get the 35,000 for a rate of 4.7% which is still in the same ballpark as @rez calculated with the initial numbers. Doesn’t sound attractive to me.

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15

You are right. I probably should have used “bank evaluation” instead of “coverage in my first post.” That might have caused the confusion.

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16

Do you have to use that extra money on renovations? If not, can you get a better return on the cash than the interest charged? What are the penalties if you repay this amount early?

For instance, buy some shares in a good dividend paying company.