What kind of equity do I need and why?
For most people, building or buying a home is the biggest investment they will make in their lives. Regardless of which type of mortgage loan you decide on (read more about this at: «What mortgage is right for me?», a portion of the purchase price of your property must be paid using your own funds and carried as equity.
A minimum of 20% of the value of the property must come from your own funds to finance your future home. Fundamentally, you can also work with a higher down payment to lower the mortgage payments and the related interest burden.
Different sources for equity
The term equity can refer to different types of assets and withdrawals:
- Personal savings (incl. Pillar 3)
As the first thing, you will certainly take a look at your bank accounts. But even if you have some savings, you should be realistic in estimating how much of it you can use as equity for financing and how much you need to keep in reserve for other expenses.
If you have a securities account, you can either sell or pledge them as collateral for the bank, and the institution will grant you a so-called Lombard loan. This solution is frequently more expensive because of the interest burden from the loan - but it can be more advantageous if the losses from the sale of the securities would be high or if you don’t want to sell them for other reasons.
- Inheritance advance / gift
Depending on your financial circumstances, in many cases parents support the home purchase. This usually takes the form of an advance against inheritance or a gift. The related transactions must not adversely affect the compulsory portion of other entitled heirs and must usually be compensated; i.e., your portion that you have already taken will be deducted upon disbursement of the inheritance. Your parents must record in writing any agreements that deviate from this general principle.
You should also note that you can become liable to pay support if your parents suffer financial difficulties later.
- Money from the second pillar
You can use your retirement savings for the purchase of a home if it is your own, long-term residence. A vacation home, for example, would be excluded from this provision. Retirement funds can be withdrawn early or pledged. Pledging is often preferable to avoid losses in performance.
Note: for mortgage loans, a minimum portion of the purchase price is required as equity that does not come from Pillar 2 accounts (early withdrawal and pledging). This minimum portion is 10%.
Last but not least, personal loans offer an option to increase your equity. The conditions are exclusively the object of the individual agreements. Request information from Basler Kantonalbank as to what the terms are for personal loans credited to your equity (repayment obligations, interest rates, etc.). You should also consider that personal loans can affect the relationship you have with your lender - especially if you are late or even unable to fulfill your repayment obligations.
Your financing is as individual as you are
The composition of your equity depends on a number of factors - your current life circumstances, your career path, and your plans. An experienced advisor give you valuable assistance in creating a meaningful savings plan for your home, clarifying questions about your retirement savings, or finding solutions for gaps in financing.