Mortgages for Investment Properties

Buying properties to rent out is very popular investment among wealthy investors in today’s negative interest rate environment.

The prime requisite to turning a good profit is investing in the right property (learn more about that here). In addition to finding the perfect property, choosing your mortgage wisely is also key to getting a return on your investment.

The cheaper the mortgage, the higher your profit. In addition to a low mortgage interest rate, many investors also try to maximize their debt-to-equity ratio. The limitations you get will depend on the lender, mortgage and your creditworthiness.

Compared to mortgaging a home that you live in yourself, mortgaging an investment property involves a number of peculiarities which you should be aware of. If in doubt, ask a mortgage consultant for advice. Here we’ve listed several key factors which you should pay attention to when getting a mortgage on an investment property.

• Loan-to-value-ratio: Note that you’ll need to pay down a lot of capital out of your own pocket. For one thing, the multiple family homes which make up the bulk of Swiss investment properties are expensive, to say the least. Then there’s the fact that lenders generally require a down-payment equal to 20 percent of the property’s value. That means in the best case you’ll get up to 80 percent of the purchase price covered by a loan. If the lender doesn’t deem you to be a perfectly safe investment, the loan-to-value-ratio may be lower than that. It isn’t uncommon for lenders to require deposits of more than 20 percent from borrowers.
• Be sure to account for the risk of interest rate changes. Mortgage rates are currently very low, but that could easily change in the future. That’s why most banks use a higher interest rate (typically 5 percent) when measuring your ability to meet mortgage payments over the life of the loan.
• Affordability: Property loan providers always check the viability of a mortgage, using your financial capabilities and facts about the property as guidelines. As well as net rental income, the viability calculation accounts for the cost of mortgage rates (using an imputed interest rate of 5%), incidental expenses and your amortization payments. Ideally, the annual rental income you will earn off your investment property should overshoot combined annual costs by a decent margin (the higher the better). The higher that profit margin, the better your chances of getting the mortgage approved. If the margin is too small, the lender probably won’t consider your mortgage to be viable.
• Another criteria which may be used when measuring viability uses the gross profit attached to the property investment. The higher the gross profits, the better. The minimum gross profit rates required for your mortgage to qualify differ between banks, and are also influenced by the seller, canton, and location of the property in question.
• Note that assets kept in retirement accounts (first and second pillars) cannot, as a rule, be used to finance investment properties. The one exception to this rule is if you reside in the property in question. In that case it may be possible to finance part of the investment using the assets you’ve stashed away in retirement accounts.
• Online mortgages do not generally cater to investment properties.
• Special discounted rates like family bonuses or energy efficient mortgages are most often limited to regular mortgages.
• LIBOR-based mortgages are not usually an option for investment property purchases. Lenders prefer to stick to mortgages with long loan tenures that make long-term planning easy.
• Don’t forget that banks are not your only bet for a mortgage, as insurance companies provide property loans as well.
• More complex property loans like swap mortgages might provide the most affordable option for high-value mortgages.
• Try to get several quotes from a number of different lenders. A comparison is certainly worth it, because the differences between mortgage offers are major. Depending on the size of your loan, the difference in costs can add up to tens of thousands of francs annually. You can use the unbiased mortgage comparison tool from moneyland.ch to quickly view all lenders that match your mortgage needs.

More information:
Mortgages compared
Investment properties in Switzerland