Is buying your main residence in Switzerland an investment?
The most important condition
To turn the purchase of a Swiss main residence into an investment, you need to resell it or rent it out over the medium term! In the vast majority of cases, this is what's needed to provide a sufficient return on your initial investment.
Why is this? In Switzerland, gross rental yields are low, around 3%.The difference between the total annual costs (interest, amortization, fees and repairs, tax costs) and the rent you would have paid isn't enough for a good return.
Yes it can be an investment: the standard case
What offsets the low rental yield is Swiss real estate price appreciation: over the past 50 years, it has averaged 2.4% per year (or 1% net of inflation) (source).
With reasonable assumptions, the expected profitability of buying and reselling in a standard case is around 5.7%. Here are the key figures for a 2m purchase:
Expand the following menus for more details:
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2m house, bought at market price
equivalent annual rent of 60k (3% gross yield)
financing: 20% cash, so a total of 400k
1.6m mortgage at 1.5% interest rate
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Rental costs are 60k per year.
The purchase costs are also 60k per year:
annual interest: 24k
amortization: 20k
fees and repairs: 15k
tax implications: negligible
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When reselling after 15 years, you get 925k back, so you've transformed 400k into 925k:
with an annual appreciation of 1% over 15 years, the property is worth 2.3m and is sold directly (no agency fees)
with 25% capital gains tax, you need to pay 25%*300k=75k tax
you have to pay off the remaining 1.3m mortgage
But beware, it's a risky investment
Investing in real estate with cash is low risk.
But investing in Swiss real-estate usually involves mortgages that are never totally repaid. So there's a leverage effect: if it goes well, the results are excellent, but if it goes badly, it can be catastrophic:
If you had invested in 1990 at the peak of the real estate bubble, 15 years later your property would be worth 13% less (and 30% less after inflation). Your 400k would have melted to 140k, 100k in real terms!
With a greater drop, you could lose your entire stake, and also owe extra money to pay off your mortgage.
You may think about waiting for prices to rise again by staying in your home longer, or by renting it out. If the cause of the price drop is soaring interest rates, like in 1990 when they reached 7%, this will cost you a lot, because you still have to pay your mortgage. You're stuck. Everyone is.
Swiss real estate is therefore risky, as is the world stock market. High returns always involve risk.
It's just a slightly different type of risk from the global stock market, which is invested at 60% in the US market and the dollar. But the two remain correlated, as they tend to both fall when interest rates are high.
How can you make your purchase more profitable?
#1 Without increasing risk
Nothing could be more obvious: buy low and sell high! Not that easy to implement though...
Buy low: buy below the market price, finding properties via private channels instead of public listings.
Sell high: get a feel for the location that's going increase in popularity, and/or transform the property to create added value.
#2 Increase leverage using Pillar 3a
You can increase profitability by (further) increasing leverage. Pillar 3a is a "free" way of doing this, as no interest is payable: it simply has to be returned after 15 years. But it is not accepted by all financial institutions.
There are two ways to use your Pillar 3a:
using it as collateral to replace part of the initial cash requirement
using it for indirect amortization: up to the annual maximum allowed (just over 7k per employee)
#3 Increase leverage by using Pillar 2
An employee's Pillar 2 yields very little, around 1% a year. Taking it out for a property purchase puts this money to work.
Pillar 2 can be used to cover up to half of the 20% personal contribution, 10%.
If you're self-employed, it's a different story: you can open a vested benefits account and choose how to invest your Pillar 2, with a much better long-term return. So it's not in your interest to use your Pillar 2 for a property purchase.
The boosted case (but with more risk)
The expected rate of return rises from 5.7% to 13% for our previous example, with the assumptions below.
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you invest as a couple, which has 100k on their Pillars 3a and pledges them as collateral (60% pledging)
both of you have employee Pillars 2 and decide to take out 200k of them
the couple amortizes 14.5k per year indirectly on their Pillars 3
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the 10% cash is financed by 140k + the 60% pledge of the 100k of Pillar 3.
200k worth of Pillar 2 completes your required 20% contribution
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with indirect amortization, you don't need to add the 15k so you gain this amount
since you have withdrawn 200k from Pillar 2, your future contributions are not tax-deductible, and you lose a few ks a year
you pay slightly more interest, since your mortage does not decrease
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When reselling after 15 years, you get 535k back, and have transformed 140k into 535k:
the property is worth 2.3m and is sold directly (no agency fees)
you pay 25%*300k=75k in capital gains tax
you have to pay off the remaining 1.6m mortgage
you have to repay the 60k initially given as collateral via Pillar 3
you miss some Pillar 2 earnings you would have gotten, had you not withdrawn that money, about 30k
Which mistakes can cost you a lot?
Mistake #1: Indirectly amortizing with a bad Pillar 3 or transferring it over
If your lender is a bank, it will try to sell you its Pillar 3a. Indirect amortization will generally only be possible via its own Pillar 3a. Don't accept. Why not?
The long-term return on a good Pillar 3a is ±7%, as it is 100% invested in global equities and has fees of ±0.5%.
An average Pillar 3a's return is ±3%, as it is partially invested in equities (gross return ±5%) and has expenses of ±2%.
After 15 years, this has the following implications:
| Annual yield | After 15 years of amortization | After 15 years of transfer | |
|---|---|---|---|
| Good Pillar 3a | 7% | 350k | 275k |
| Average Pillar 3a | 3% | 260k | 155k |
If, as a couple, you take amortize indirectly 14k each year, that's a difference of 90k.
Worse: if you transfer the 100k from your good Pillar 3a to an average Pillar 3a, that's a 120k difference.
In conclusion, if you amortize indirectly or put your Pillar 3a as collateral, only do it in a good Pillar 3a.
In 2024, there are just a handful: Viac, Finpension, Truewealth, and Frankly.
Mistake #2: Amortizing more indirectly through a Pillar 3b
The maximum contribution to a Pillar 3a is just over 7k for an individual and 14k for a couple, so you can't amortize more indirectly via a Pillar 3a.
If you need to amortize more, it can be tempting to use a Pillar 3b, since contributions there are unlimited.
Why is it tempting? The money is invested and any capital gains will be yours.
Why shouldn't you do it? It's because the account is a mized insurance (it's used to cover death/disability risks) and investment product. As a result, these Pillar 3b accounts are costly and opaque:
a significant portion of monthly payments is used for the insurance part and disappears
management fees are often high, in the 2% range
I challenge you to read the contract and understand all the costs and investment vehicles, so that you can calculate retroactively how much should be in your account.
Mistake #3: Relying on the feedback of a single financial institution
Conditions vary enormously between financial institutions. It's not uncommon to miss an opportunity because one institution refuses financing or certain conditions. And to mistakenly assume that this will be the case with the others.
Some allow you to use good Pillar 3a accounts as collateral and for indirect amortization. Others do not.
Some will tell you that your property is above market price and ask you to provide cash for the difference, even though 100 buyers are already in line. Others won't.
Some refinancers will ask you to continue to amortize. Others revalue the property and don't ask for it. Others even increase your mortgage and free up cash for you.
Etc.
I advise you to consult a good broker and also all the banks that offer a good Pillar 3a.
About the author
Hello, you can call me Margot.
I'm a French expatriate living in Switzerland. I've been investing for 15 years.
With assets in the low millions, I'll probably never have a family office, so I have to stay in the driving seat. How can I grow my assets further and pass them on to my children?
AskMargot is my testimonial, that of a peer, to go further in wealth management.
You'll find unique content, more advanced than what you'll find on beginner investment blogs or in the wealth reports of French or Swiss asset managers.
Don't hesitate to contact me if you'd like to discuss your wealth strategy with a peer.
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