Can I buy a flat if my income is high but my equity is low?

Understanding the hurdle: loan-to-value ratio vs. affordability

Why income alone is not enough

If you want to buy a flat, the bank will examine two pillars:

• Affordability: Can you pay the running costs? Here, you are on the safe side with a high income.
• Loan-to-value ratio: What percentage of the purchase price will the bank lend you? This is where the problem lies if your equity is low.

In Switzerland, banks finance a maximum of 80 per cent of the market value (loan-to-value ratio). This means that 20 per cent must come from other sources. Even if you earn a million a year, no regular bank will lend you 100 per cent of the purchase price. If your equity is low, your high salary will help you with the monthly payments, but it will not replace the necessary down payment.

The quality of your own funds: "hard" vs. "soft"

If your equity is low, banks will look very closely at what you actually have. Of the required 20 per cent, at least 10 per cent must be "hard" equity (account balances, securities, pillar 3a). The other 10 per cent can come from your pension fund (pillar 2).

If your equity capital is low, you will often fail to meet this initial 10 per cent "hard" capital requirement. This hurdle is enshrined in law and is hardly negotiable.

Solution strategies for high earners with little savings

If your equity capital is low but your income is high, there are specific instruments available to you that are often not an option for average earners.

1. Pledging instead of early withdrawal (pension fund)

This is the supreme discipline for high earners when equity appears low. Instead of withdrawing money from the pension fund (PF), you pledge it.

• The mechanism: you leave the money in the PK, but transfer it to the bank as collateral.
• The advantage: as your income is high, you can afford a higher mortgage (up to 90% or sometimes even 100% loan-to-value ratio if the PC serves as additional security). The bank grants you the mortgage because the PC could be accessed in an emergency.
• The condition: this only works if your pension fund balance is high enough to cover the missing free capital. If your pension fund balance is still low (e.g. as a young newcomer), your equity capital will remain low and the hurdle will remain.

2. Provide additional collateral

If your liquid equity is low, you can offer other assets as collateral.

• Securities: A share portfolio can be pledged (Lombard loan) instead of being sold.
• Life insurance policies: Banks often accept surrenderable policies as collateral (pillar 3b).
• Third-party collateral: Perhaps your parents or relatives own a property that is almost paid off. They can draw up a mortgage note on it and give it to your bank as collateral. This will allow you to buy even though your own equity is low.

3. Interest-free employer loans

Some large Swiss companies offer their employees support in buying their own home. A loan from your employer can help if your equity is low. But beware: banks often only accept this as a subordinated loan, and it is added to your debt, which in turn affects your affordability (which is good in your case, however).

4. Advance inheritance or gift

If your own equity capital is low, the "Bank of Mum and Dad" is often the saviour. Important for the bank: the money must not be a loan that you have to repay. It must be a gift or an advance on your inheritance. A mere loan would be considered debt capital and does not help if your equity capital is low, as it does not improve your equity ratio.

The strategy of "forced saving"

Since your income is high, the "low equity" situation is often only temporary. Talk openly with the bank. Sometimes banks grant a higher loan-to-value ratio if you commit to aggressively amortising (repaying) the mortgage in the first few years.

• Example: You finance 85% instead of 80%, but commit to repaying the excess 5% within 3 years from your high salary. This is a case-by-case decision and requires negotiating skills, as low equity is actually an exclusion criterion.

Risks when equity is low

Even if it works out, if your equity is low, you will start out with a high level of debt.

• Higher interest rates: Banks often penalise high loans with interest surcharges.
• Amortisation obligation: Anyone who buys with little equity has a high second mortgage. This must be paid off within 15 years or by retirement. Your monthly burden is therefore significantly higher – but you can afford it thanks to your high income.
• Value fluctuations: If your equity is low, a decline in the value of the property will hit you harder. If the price falls by 20%, your entire capital will be wiped out (shortfall).

Conclusion

The answer to the question "Can I buy if my equity is low?" is: yes, but it is difficult. The Swiss system is rigid. The 20% rule is almost impossible to circumvent, but it can be worked around. Your high income is your strongest lever here. It enables you to make high repayments and makes you the ideal candidate for a pension fund pledge.

If your equity is low, you should not give up at the first "no". Seek advice from specialist financial advisors who know about solutions beyond the standard options. Often, a combination of pledging, advance inheritance and aggressive amortisation is the key. Nevertheless, the rule of thumb is that at least 10 per cent "hard" funds (or collateral) are almost always the ticket, even if the remaining equity is low.

Find out about the options available at Loft to review your individual financing strategy.

Glossary

• Low equity: A situation in which the buyer has less than the usual 20% of the purchase price available in liquid funds.
• Pledge: Use of assets (e.g. pension fund) as collateral for the bank without withdrawing the money. Ideal for high earners when equity is low.
• Loan-to-value ratio: The ratio of the mortgage to the market value of the property. In Switzerland, it may not exceed 80% (exceptions only with additional collateral).
• Affordability: Checking whether the income is sufficient. High earners easily meet this requirement, but often fail to clear the hurdle of "low equity".
• Hard equity: Capital that does not come from the 2nd pillar (e.g. savings account). At least 10% is mandatory, even if the income is high.