Mortgage and Hypothecary Loan Contracts in Switzerland
The mortgage loan is the primary financing instrument for real estate acquisition in Switzerland. It combines a loan agreement (art. 312 CO) with a real property security, usually the mortgage certificate (cédule hypothécaire/Schuldbrief) (art. 842 SCC). Understanding the contractual and legal mechanisms governing mortgage financing is essential for any real estate acquisition. PBM Avocats advises borrowers and lenders in Geneva and Lausanne.
Structure of Mortgage Financing in Switzerland
| Element | Description | Legal Basis |
|---|---|---|
| Loan amount | Generally up to 80% of the property value (LTV) | Art. 312 CO |
| Mortgage certificate | Security pledged to the lender | Art. 842 SCC |
| 1st rank mortgage | Max. 2/3 of property value | FINMA rules |
| Interest rate | Fixed, variable or SARON-based | Contractual |
| Amortisation | Indirect (2nd pillar/3rd pillar) or direct | Banking practice |
Types of Mortgage Loans
- Fixed-rate mortgage: interest rate fixed for the agreed duration (usually 2-10 years); exit costs (break costs) may be significant
- Variable-rate mortgage: rate fluctuates with market; notice period usually 3-6 months for termination
- SARON mortgage: rate indexed to the Swiss Average Rate Overnight (SARON); generally renewable every 3 months
- 2nd-rank mortgage: additional financing between 2/3 and 4/5 of property value; higher rate; must be amortised
The Mortgage Certificate (Cédule Hypothécaire)
The mortgage certificate (art. 842 SCC) is both a real security right encumbering the property and a debt instrument (book-entry or paper). Since the 2012 reform, the book-entry mortgage certificate (registerpfandrecht)} has become the standard form: no physical certificate is issued; the right is inscribed directly in the land register.
Key characteristics of the mortgage certificate:
- It is a real property security right that follows the property
- It may be assigned (as security) to a new lender without the debtor's consent
- It is independent of the underlying loan (abstract security)
- Its amount may exceed the loan amount (to allow future advances)
Early Repayment and Break Costs
Early repayment of a fixed-rate mortgage before its term generally triggers break costs (prepayment penalty) calculated on the present value of the interest differential. These costs can be substantial (several percent of the loan amount) and should be carefully assessed before purchasing a property with an existing mortgage or before refinancing.