Considering financing options for your real estate? Lombard loans may be an option

Poor mortgage terms can increase your costs and tie you to a lender for many years. So, what’s the best way to evaluate your options when renewing your mortgage? It’s important to strike a healthy balance between your financial assets and real estate assets, keeping a debt level that’s in line with your personal needs. At Lombard Odier, we can offer you mortgage advice that’s tailored to your situation, with the support of our internal experts. We don’t actually provide mortgages so our advice is free from any conflict of interests. Thanks to our partnership with MoneyPark, Switzerland's leading mortgage broker, we can give you access to an overview of the market.

Let’s take an example of Mr and Mrs Schmidt¹. They have CHF 1 million in their investment portfolio, their house is valued at CHF 2 million, and they have taken out a mortgage of CHF 1 million. The couple took out a fixed-rate mortgage ten years ago, which is due to expire in three months. Should they pay off their mortgage with their investment portfolio? Should they renew the mortgage? If so, under what conditions? Are there any other alternatives to consider? We lay out three scenarios below:  

1. Mortgage repayment

If Mr and Mrs Schmidt use their financial assets to pay off their mortgage, they will no longer have any debt, but they will be exposed to risks in the event of future financial needs. The disadvantages of this choice are clear for the couple, as they will have neither the growth potential of their wealth nor the opportunity to realise tax savings² with their mortgage interest payments. However, they will still be taxed on their home's rental value. 

2. Renewal

Mr and Mrs Schmidt’s relationship manager can offer them extended renewal terms with the support of MoneyPark, whilst taking into account other factors, such as retirement, maturing investments or an inheritance. We would recommend using different providers for mortgages and for wealth management services. The couple's mortgage should also be split into several tranches, as they could be captive to one single institution and lose their bargaining power. If they opt for fixed, short-term rates, their private banker can propose investment strategies to hedge the risk of future rate increases. Complete mortgage renewal would give them tax advantages and, if necessary, ready cash. 

3. Lombard loan

Another solution would be for Mr and Mrs Schmidt to borrow 600,000 francs in the form of a Lombard loan³ (pledging their portfolio), for example to Lombard Odier. Some of this cash could then be used to reduce their mortgage (from CHF 1 million to CHF 700,000) and some to increase their financial investments. The timing for the increase in investments must be carefully managed, and the loan from the bank should result in savings compared with the mortgage rate and in an increased return on the portfolio, all other things being equal. 

Regardless of the option chosen by the couple, a proactive and planned approach before their mortgage expires will potentially offer them significant savings and new opportunities. Your private banker will be happy to discuss all aspects of your financial and real estate planning with you.

¹ The names used and example is just for illustration purposes.
² Lombard Odier does not provide tax advice. It is therefore recommended that the client’s tax advisor analyse the situation in the case in question to assess the issues at stake
³ Although it has the same name, the lombard loan has no connection to our Bank