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No Mortgages for Americans? Signing the Contract

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While many neubau owners have to make large payments throughout the building process that require them to take early mortgages, our company offered us a simple and attractive purchasing plan in three steps:

  1. 30k Reservation fee
  2. 15% Sale price due when the contract is signed (minus reservation fee)
  3. 85% Sale price due when keys are handed over

After we visited the flat and decided we really wanted it, we paid the reservation fee and in theory, we were given a week to sign the contract.

The contract took forever to arrive though, and when it did we took it to VermögensZentrum in Zürich to have it reviewed by professionals. VZ gave us some helpful tips of things we should have changed or clarified and we had the contractor make the changes for us to sign.

There were some scary tidbits in the contract that we couldn’t change due to the fact that I am not Swiss (which I’ll mention later), but overall everything looked good. However it took ages for the contractor to remember to include the motorcycle parking space that Kay wanted for his bike so we kept waiting.

Kay was also in Cambodia for a month traveling, so much of the back and forth about the contract was done by email in German. It was pretty frustrating at times if I didn’t understand something and Kay was hard to contact. I met him in Singapore for holiday and it was there that we had our first big scare about buying because I am American.

While VZ ist not a bank, they also offer mortgages and they notified us that while we were qualified to buy the flat, they no longer offer mortgages to Americans due to the new implications FATCA brings to financial institutions outside the US. They were warning us that it might not be possible to buy unless we came up with an additional 160,000CHF so Kay could buy the flat by himself. Riiight. Like we have that kind of money laying around…

“Whatever!”, I thought. We were already pre-approved for a mortgage with Axa-Winterthur, so we are fine.

Kay was nervous though. So when I got back from Singapore, he had me contact Axa to see if they would still accept us even though it had only been a month since I’d met with them. But sure enough, when I contacted our insurance representative again, he told me,

“I’m sorry, but three weeks ago we changed our policy. Axa-Winterthur is no longer accepting Americans for mortgages.”

SHIT.

I started contacting other banks and insurance companies about their mortgage offers. No, no, no.

When Raiffeisen told me over the phone that they aren’t accepting American customers, I felt my stomach sink further than it has in years. This is not something about myself I can “fix”. I am American and I am only American. I do not have another citizenship, nor can I toss aside my only citizenship to free myself from these prejudices.

It was a sobering experience. Ten of the fifteen banks I contacted told me they flat out do not accept Americans anymore. I’ll write you all the reasons why I loathe FATCA later, but I understand the viewpoint of the Swiss institutions. It is a PIA for them to fill out paperwork for the IRS just because their customer is American. The IRS’s filing requirements for Americans living and working abroad are unfair for everyone involved, so many places here are taking the decision to simply avoid working with Americans.

It left a hard decision for us though. Kay had come home from traveling in April. The flat we reserved would not be ready for over a year and we had no idea which banks would say “yes” or “no” to Americans by the time we need to pay step #3.

Would we risk committing to buy a flat and not being able to finance it later because we are rejected for mortgages based on my citizenship?

Hell yes, we did!

We had around 5 banks that said they still accepted Americans, so it’s not like we couldn’t get a mortgage. We even had another big bank pre-approve us again before we bought and we were moderately happy with the terms. The risk is that we might not have the best mortgage offers available to Swiss and non-Americans, but that’s a risk we were willing to take in order to buy.

Have you read up about FATCA yet? It’s really not well thought out. But more on that later.

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How we found our giant terrace

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When I was looking through flats in Building A, I was scanning over all the floor plans together and several flats with unusually large balconies caught my eye.

It seemed that on just one side of the building complex, the ground floor was wider and huge terrace balconies were built on top of the extended ground floor.

The second floor flats on this side of the building have huge 92sq m (990sq ft) terraces, but if you went one floor higher to the 3rd through fifth floors, you would lose the large balcony and pay 20,000CHF more per level rise.

The flats on that side of the building still had pretty big 29sq m (315sq ft). But who in their right mind would pay thousands more to have so much less space?

Continue reading How we found our giant terrace →

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Paying for Sunshine

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After reviewing hundreds of neubau flats, I noticed an interesting pricing structure. You pay to be higher up, but you also pay for more sunshine.

It even works similarly with rentals. People pay more money to have a sunnier location and sunshine seems to be very important for the Swiss. How else will you grow your herb garden?

But at times it seems a bit ridiculous.

Continue reading Paying for Sunshine →

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Shopping for houses

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Despite all the scary figures I mentioned earlier, I was confident that with our savings we would be able to buy some kind of modest flat and profit on this extremely low interest.

I spent hours on Comparis looking at houses and flats. We couldn’t afford anything besides a shoebox in downtown Zürich, but there were many flats outside the city and even entire houses that were possibly in our budget.

Having been raised in Switzerland, Kay had the notion that you don’t buy property unless you are 40 or have kids. (That’s not us.) It took some time to convince him that we don’t have to fit into the stereotype for buying to be an advantageous financial choice.

The big question was size and location. Sure, we could sort of afford a 6.5 room apartment (= 5 bedroom flat) or even a 7 room house complete with garage, basement, backyard and everything, but that would mean sacrificing on location.

We do like living in Zürich and realistically, in the next 20 years we will probably change our jobs a few times. With that in mind, we are not quite in a position to commit to a small town an hour and a half away from Zürich city by train/bus.

Who in their twenties wants to worry about catching the last bus back to the middle of nowhere at the end of the night? Not us.

We have to be close enough to Zürich that if one of us would have to get a job outside, we would not have an impossible commute. Buying a car to save on commute time would also kind of negate the “saving” aspect of buying a house.

So we started limiting the search to flats in the vicinity of Zürich city, under 20 minutes to the main station by train. I mean, we just don’t need a house right now. As much as I think it would be cool to have 5 bedrooms and build a photography studio, we just don’t need that much space right now.

I saw a few older flats that could possibly be contenders, but when Kay and I visited a 3 bedroom 80 sq m flat (861 sq ft) it felt cramped and although it was technically IN Zürich, it was kind of a crap neighborhood with nothing going on around it. It was depressing.

Kay was really unimpressed with the old interior and the smell of smoke and other places we saw had 30 year old windows or unfinished interiors that would all require possibly hundreds of thousands in repairs. Some had winter gardens (like an enclosed glass balcony) but no real balcony, aka no grilling. It was always something. And none of the locations were really spot on.

Some older flats also come with “Baurecht“, which basically means somebody owns the land your flat or house is on. They have a 20-100 year contract with people to rent this land from them to build on, and you might end up paying like 400-1000CHF a month just for renting your land. It’s a pretty unattractive detail and makes it hard to sell your house if you do get suckered into a deal like that. You’ll never pay 300CHF a month in mortgage costs if you’ve always got those bloody building rights to deal with.

With all this information, we just weren’t sure buying a fixer-upper or an older flat sounded like a good idea right now.

Up next, we discover Neubau!

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How to buy a house in Switzerland

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When I found out how low people’s mortgages were with 1-2% interest rates, I was determined to figure out how buying works. When you break it down, it’s not that hard…

1. Find a place you want to buy.

2. Deposit = 20% of the sale price

20% is the magic number here. The Swiss are rather reserved, hence the large number. I have heard cases of people negotiating the bank down to 15% or even 10%, but with the economic situation turning a little in the last year, many banks are sticking to the 20% rule and the fact is, if you cannot afford to give them the 20% (even if you negotiate down to 10%) then they will not loan to you.

3. Calculate the affordability

The same way that Swiss calculate if you can afford your rent by making sure it is 1/3 or less of your monthly salary, they make sure that you can afford buying a home too.

Interest rates might be historically low right now, but every bank uses a simple method to figure out if you earn enough money to live comfortably with a mortgage. Affordability rates are based on 5% interest regardless of the current prices. If you cannot afford to pay a 20% deposit and 5% interest mortgage, the bank will not back you.

Obviously if interest is at 8-10% you would also need to be able to afford that for the bank to lend you money, but since rates are close to zero right now, every bank is calculating based on the average 5%.

To figure out your monthly costs you can plug everything into a simple Excel sheet and run the numbers to see if buying makes sense for you. Along with monthly interest payments, you need to amortize your mortgage by 1% monthly. The typical Nebenkosten (utilities) you normally pay along with your rent are estimated around 0.7% of your property’s value along with a renewal fund of 0.3%. Flat owners pay into a communal renewal fund to fix things like roofs and home owners save to pay everything themselves.

So, that’s another 1% on top of your mortgage and 1% from the sale price. The total monthly payment still needs to be under 1/3 of your monthly income in the 5% model for a bank to consider this a safe purchase.

Here is a quick affordability model on a 1 million CHF house:

Swiss Affordability Model

If one has the 200k capital for the downpayment, buying 1 million CHF houses is not actually the most crazy thing in the world right now. It would, however, require an annual household income of approximately 180,000 CHF. (4583.33 CHF X 13 months salary = 178,749 CHF)

But when I was researching house buying, I learned another important lesson: Not every house or flat in Switzerland costs millions! There are actually a handful of flats available for 300-500k CHF as well as many more in the 500-800k range. What does the affordability look like for a 500,000 CHF flat?

Swiss Affordability Model 2

Once you have the 100k downpayment, buyers would only have to an annual household income of 90,000CHF to afford a home with this price. And 1250CHF a month on the current model is less than half of what we currently pay for rent. Numbers like these are what turned me on to looking!

The affordability model can also be used in reverse. To find out how expensive of a home you can afford, just multiply your savings by 5 to see which houses you can afford. With 80k you can probably afford a 400k house. With 150k you could afford a 750k house.

4. Make an offer

The fun part of making an offer, countering, and most likely raising how much money you wanted to spend. The real estate market is pretty tight here and most sellers enjoy a couple rounds of offers from bidders fighting to buy a house.

You can be sure that if you buy a preexisting house in a nice location, there will be many people looking to buy it. Some people spend years looking for a house to buy and it’s very likely that your house buying experience will be filled with a lot of heartbreak, unless you are able to shell out a lot of money.

5. Finding a mortgage

Often people will visit some banks before they start looking to buy homes to know that there are already financial institutions who will support a purchase.

After you find a place and agree on a price (Hah! Easier said than done!) it is time to find the best mortgage. This is where you can shop around for the best deal, with lenders bending over backwards to make you their client.

6. Closing and handover

When you get through all the complicated shit of agreeing on a sales contract, having a lawyer or insurance agency proof the contract and recommend changes, house inspections, and a bunch of paperwork about the house and land dating back hundreds of years, you will need to get everything notarized to make the sales contract official and agree on a payment schedule and handover process.

Notary costs usually range around 1.5-2% of the sale price, but depending on what kind of house you buy you might also have to pay for land register and permit applications, which could take the number up to 2-5% of the sale price.

Payment schedules vary depending whether you are buying a new or old house. Older houses might require a small downpayment and then the remaining amount paid when your permit is approved. For people building, there is usually a large downpayment, halfway progress payment and then the final 1/3 or so is due when the keys are handed over.

Once you understand how much you can afford, the whole process is relatively straight forward. Be prepared to spend a lot of time visiting homes and building sites and even more prepared for all the paperwork that will come your way if you decide to purchase.

How does the buying process vary where you are from?

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