How much equity do I need to buy a flat?

The financial foundation: analysis and facts

What is equity and why is it important?

Before you can buy a flat, you need to understand how the bank views the value of the property. Banks usually finance a maximum of 80 per cent of the lower value of the purchase price and market value estimate. You must contribute the remaining 20 per cent as equity.

If you want to buy a flat, higher equity reduces the risk for the bank. They often reward this with better interest rates. At the same time, a high equity share reduces your mortgage debt. This means that your monthly interest payments are lower, which makes long-term financing more secure. If you buy a flat with the absolute minimum, you will have less leeway if interest rates rise in the future or unforeseen renovations are necessary.

How is the amount of equity calculated?

The rule of thumb is 20 per cent as a starting point if you want to buy a flat. However, this 20 per cent is subject to strict quality criteria. The Financial Market Authority distinguishes between "hard" and "soft" equity.

• Hard equity (minimum 10%): If you want to buy a flat, at least 10 per cent of the mortgage lending value must come from funds that do not originate from your pension fund (2nd pillar). These include:
• Account balances (savings account, salary account)
• Securities (shares, funds)
• Pillar 3a assets
• Gifts or advance inheritance payments (confirmed in writing)

A calculation example: If you want to buy a flat for CHF 1 million, you need CHF 200,000 in equity. Of this, CHF 100,000 must be "hard" cash.

What other costs do you need to factor in when buying a flat?

A common mistake that prospective buyers make when purchasing a flat is forgetting about the additional costs associated with the purchase. These fees are usually not financed by the bank and must be paid out of pocket in addition to the 20 per cent equity.

When you buy an apartment, the following costs are incurred, depending on the canton:

• Transfer tax: In cantons such as Bern or Vaud, this can amount to up to 3.3% of the purchase price. In Zurich, it is usually waived for residential properties.
• Notary fees: For the notarisation of the purchase contract (approx. 0.1% to 0.5%).
• Land registry fees: For the entry of the transfer of ownership.
• Mortgage deed fees: Costs for establishing the lien.

Experts advise: if you want to buy a flat, be on the safe side and budget an additional 3 to 5 per cent of the purchase price for these ancillary costs. For a purchase price of CHF 1 million, that's up to CHF 50,000 extra that must be available in cash before you can buy the flat.

Affordability: the second bottleneck

Even with sufficient savings, your plan to buy a flat may fail. The bank will check your affordability. The running costs (imputed interest of 5%, amortisation, maintenance) must not exceed one third of your gross income.

If your income is low, you often have to put in more equity to reduce the mortgage and meet the affordability requirements. This means that you may need 25 or 30 per cent equity to buy the flat, even though 20 per cent would be sufficient from a purely regulatory point of view.

Tips for building up equity

Buying a flat requires discipline. Here are some strategies for saving the necessary funds:

• Maximise your pillar 3a: pay in the maximum amount each year. This saves you tax and builds up "hard" equity that you can use when you want to buy a flat.
• Advance inheritance: Talk to your family. An advance inheritance or gift is often the most effective way to close the gap and buy a flat.
• Savings plan: Set aside a fixed amount each month as if you were already paying mortgage interest. This will help you get used to the financial burden you will face when you buy the flat.

The same applies to newcomers (expats): if you have your main residence in Switzerland, you can usually buy a flat without restrictions. The financing rules (20% equity) apply in the same way.

Conclusion

The question "How much money do I need?" cannot be answered with a single figure. If you want to buy a flat, you must calculate at least 20 per cent of the purchase price as a basis. Of this, 10 per cent must be "hard" equity. However, in order to be able to buy a flat safely and sustainably, you should calculate 25 per cent of liquid funds, including ancillary purchase costs and a buffer for renovations.

Never underestimate the additional costs and the affordability calculation. Buying a flat is a marathon, not a sprint. Solid preparation and knowledge of "hard" and "soft" funds will protect you from unpleasant surprises. Only those who know their figures can buy a flat with peace of mind and enjoy their property in the long term.

If you are looking for support in analysing your financial options, Loft can help you make the process efficient and secure.

Glossary

• Equity: Financial resources provided by the buyer. If you want to buy a flat, this is the difference between the purchase price and the mortgage (min. 20%).
• Incidental purchase costs: Fees such as notary, land registry and transfer tax. These are incurred when you buy a flat and are usually not financed by the bank.
• Property financing: Structuring the purchase price using equity and borrowed capital (mortgage). A key element when you want to buy a flat.
• Hard equity: Capital that does not come from your pension fund (e.g. savings, pillar 3a). At least 10% is required to buy a flat.