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Seven questions to ask before buying a property
LO Patrimonia SA
Lombard Odier Group
Buying a house or apartment is a life event that both impacts us on a day-to-day basis and affects our wealth over the long term. That’s why, when purchasing the home of your dreams, it is essential to consider a number of legal, tax and financial issues to avoid unwelcome surprises.
At Lombard Odier, we advise addressing several important questions before making any property purchase to protect yourself and your loved ones, and to anticipate the implications of your decisions. Below, you will find seven key issues for consideration, which should of course be adapted to reflect your personal circumstances.
1. Who is purchasing the property?
This might seem self-evident, but this question needs to be examined from several angles. Are you purchasing a property alone or jointly with your cohabiting partner, your spouse, or other family members? From the perspective of efficient estate planning, this issue must be carefully considered to anticipate the legal, tax and asset implications of divorce, death or resale, for example.
Purchasing alone involves bearing all of the costs alone, but also means being the sole holder of the rights associated with the property. Conversely, a joint purchase requires agreement between the co-owners when it comes to resale. Joint purchase also involves dealing with the fate of the co-ownership share in the event of death. This is a particularly thorny issue for cohabiting partners, who are not statutory heirs. In the absence of a will, pre-emption rights or other testamentary provisions, the cohabiting partner has no automatic right to the co-ownership share of the partner who has predeceased them. If there is a requirement to share the inheritance with descendants or, if there are no descendants, with one/both of the surviving parents, this issue can also arise for spouses who are co-owners. These problems can be avoided by making adequate testamentary provisions supported by good advice.
2. Who is financing the property purchase?
Once the question of ownership has been resolved, the question of finance arises. The financing structure and how it is distributed can vary or be aligned with the owner or owners entered in the Land Register – for example, shared equally between two individuals. In some cases, the requirements are dictated by the mortgage lender.
In the event of divorce, the property may become an issue. Just because the property is registered in the name of one or the other, or is co-owned by the spouses, does not mean that the property will automatically revert to its owner. In the absence of a marriage contract, it is important to pay particular attention to the funds invested in the property. If the funds originate from a gift or inheritance, or belonged to the spouses before their marriage, proof of ownership must be kept. If it cannot be proved that the funds are part of the spouse's own property, the presumption in favour of community of acquisitions will apply. When the marital property is liquidated, although each spouse will take back their own assets, assets acquired after their marriage will be shared equally between them, unless otherwise agreed.
Read also: Inheritance and lifetime gifts: quick wins to optimise your estate
3. How is the property purchase to be financed?
The most common way to make a property purchase is to take out a mortgage loan. Here too, it is important to address several questions in advance – with the help of advisers – particularly with regards to interest and duration.
In addition, should indirect repayment of the debt be prioritised by means of a Pillar 3 pension fund? This makes it possible to deduct the pension contributions made from income tax and then, when the funds are drawn down to repay the debt, tax advantages apply. This amounts to indirectly deducting the repayment of the debt, which would not otherwise be possible.
If your finances allow, a property purchase can also be organised by means of a Lombard loan1. This is a fixed-rate loan granted against liens on liquid assets, such as equities, bonds or investment funds, up to a certain percentage of their value. The borrower therefore keeps all of the advantages associated with the assets (e.g. voting rights and dividends in the case of equity holdings), without having to reduce their capital and the potential returns to obtain the required cash. Obviously, a combination of a mortgage and Lombard credit is also possible.
Read also: Tax deductions: how to optimise Pillar 2 buybacks
4. Can I withdraw a sum from my pension fund?
When it comes to the purchase of property, Pillar 2 and restricted Pillar 3 (3a) pension capital can make up a substantial proportion of equity capital required. However, it should be noted that a minimum of 10% of equity capital must come from a source other than Pillar 2 assets. This pension capital may only be used for your primary residence and, if you are married, the withdrawal of assets from Pillar 2 requires the signed agreement of your spouse.
Up to the age of 50, you may access all of your old-age pension assets (vested benefits). After that, the maximum you may withdraw is limited to the vested benefits to which you were entitled at the age of 50, or half of the vested benefits to which you are entitled at the time of the withdrawal, whichever is higher.
This has become increasingly common in recent years, but keep in mind that early withdrawal of your pension capital reduces your retirement benefits. With many pension institutions, death and disability benefits may also be allocated.
Here too, the tax implications need to be taken into account if you decide to withdraw pension fund assets. Firstly, you will have to pay the tax related to the withdrawal of your pension capital. And, secondly, it will no longer be possible to make voluntary contributions to your fund (buy-ins), which are fully deductible from income tax, until the initial withdrawal has been repaid in full.
5. Would it be preferable to grant a lien on my pension assets?
Instead of withdrawing your Pillar 2 assets, in certain circumstances it is also possible to grant a lien on these assets to your mortgage lender. These funds will then serve as a guarantee.
If this is a possibility for you, it is preferable to opt for a lien on those assets. You thus avoid the tax consequences associated with early withdrawal and fully maintain your ability to buy into the pension fund. Finally, by choosing this option, the insured benefits remain unaffected.
Read also: How to boost your pension provision with equity investments
6. Can I withdraw my 3a assets?
Overall, the use of Pillar 3a assets is very similar to withdrawing a lump sum from a pension fund. That said, from a tax perspective, it could be beneficial to set up several Pillar 3a accounts/policies to make it possible to stagger the withdrawals over time.
7. What are the tax implications of buying a property?
In Switzerland, property owners are taxed – through income tax – on the rental value of their property. This amount corresponds to the hypothetical rent that could be obtained from renting the property. However, if there is a debt on the property, the mortgage interest can generally be deducted. The cost of maintenance of the property is also tax-deductible. However, improvements that increase property value (e.g. construction of a garage, conservatory, etc.) cannot be deducted from income tax. Such costs are added to the purchase price and will reduce any capital gains in the event of resale. Close attention must therefore be paid to the relevant wording. If the maintenance costs are not deducted in the year in which they are paid, these costs cannot be subsequently added to the purchase price. It should be noted that there is currently a draft law providing for the elimination of rental value for primary residences. With regards to wealth tax, the tax value of the property is added to wealth tax, while the mortgage debt is deducted.
Our asset management and estate planning experts can provide support on all these issues throughout the life cycle of your property projects.
Our view of the Swiss real estate market
We do not foresee a sharp rise in interest rates, but expect a gradual normalisation of rates towards long-term levels. In light of this, the market that is likely to perform best is the residential rental market, as its fundamentals remain sound: demographic growth continues and excess supply is decreasing following a decline in investment during the pandemic. Rental growth is therefore likely to be maintained, supporting prices.
In contrast, the prospects for owner-occupied residential property are more modest. Several regions at risk according to the UBS Real Estate Bubble Index due to high property prices, which means ownership is no longer within reach of many households.
This risk could spread across the whole market if rates rise, given that the burden of servicing the debt would become too high for many wishing to purchase their first property. For those who are already homeowners, the issue of whether the debt servicing remains sustainable will arise as soon as they need to remortgage. Everything therefore depends on the prevailing economic situation and interest rate levels when current mortgage agreements expire.
1 The term "Lombard loan" is not related to the name of our firm, Lombard Odier & Cie
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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