The dream of home ownership: how to raise equity

Financing the purchase of a home requires at least 20% equity, since only 80% of the purchase price can be financed with a mortgage. A purchase price of CHF 1 million requires CHF 200 000 which you have to contribute as equity. This is a huge sum, especially for young families and couples.

But how do you raise the money? Equity may consist, for example, of money in the bank or securities proceeds. But these amounts are often not sufficient for the purchase of a property. It is good to know that there are other financing options: the use of assets from the second and third pillars or from an advancement of an inheritance.

Equity from occupational and private pension provisions

There are two ways of using occupational and private provisions for equity: an early withdrawal or a pledge. Money from the pillar 3a* can also be used to acquire real estate. The same rules apply here as for the second pillar**.

• Early withdrawal: How much money can be withdrawn early can be found in the pension fund certificate. One disadvantage is that the retirement capital decreases. In addition, pension funds generally also reduce death and disability benefits. This can be avoided with private risk protection. Since 2012, banks and insurance companies have also demanded 10% "real" equity (saved assets or pillar 3a benefits) that does not fall under the 2nd pillar.
• Pledge: If pension assets from the second pillar or pillar 3a are pledged, the insurance cover and retirement capital will remain intact and can be used as collateral for a higher mortgage. However, this results in a higher interest rate burden.

Tip: Since each financing arrangement is individual, you need to clarify whether a pledge or an early withdrawal is more suitable. It is advisable to involve an expert in all cases.

Equity from an inheritance advancement and private loans

Another way to raise equity is through an inheritance advancement, meaning that the parents give you a certain amount while they are still alive. By law, this amount must be offset against the subsequent inheritance (offset obligation).

The following points, in particular, must be observed: 

• Parents should state in writing whether and to what extent the inheritance advancement should be offset.
• The statutory portion of the other heirs must not be affected.
• In order to prevent disputes, siblings should be informed about the inheritance advancement.

Instead of an inheritance advancement, parents or acquaintances can also grant a loan. This money is generally accepted as equity by financial institutions. An expert should be involved in drawing up the contract (interest, term, etc.). The document should then be reviewed by a notary public or lawyer.
Due to the complexity of the topic, it is important to obtain comprehensive advice. One of our experts analyses the financial situation and provides valuable tips on how to finance the purchase of a home – so that home-owners can look forward to the future confidently in terms of their finances.

* Pillar 3a: Pillar 3a describes the form of provisions at a bank or insurance company.

**The 2nd pillar comprises the pension fund, vested benefits policies or vested benefits accounts.

Image source: iStock, AleksandarNakic