Updated: Dec 22, 2019
Talking about money and large purchases often makes people uncomfortable. On the contrary, it is something I grew up openly discussing and to this day I feel natural expressing my thoughts and ideas relating to personal finance. Both of my parents were teachers, which meant there wasn’t a windfall of money when I was growing up. However, even with three kids and a modest income, my parents did a wonderful job of saving, provided a lovely home, and everything we needed to be happy and healthy. In order to pass on their successful financial knowledge and planning, my father decided it was very important to teach his three kids about budgeting, buying a car and mortgages.
As a child, I remember my dad bring a computer home. This beast, a mid eighties model, had one of the first versions of Excel, which Dad installed with a series of enormous floppy disks. While ancient compared to today’s financial applications, Excel offered exactly what we needed to track all things money and my Dad became quite adept at using the program. I still remember the printer paper, with holes on the side, lying on the dining room table. I felt extreme excitement when Dad would call all three of us kids into the room to explain the budget for the month and identify the lucky winner. Sometimes the prize was a new pair of jeans and sometimes it was equipment for one of the many sports we played, like basketball shoes! Although the concrete items such as buying shoes and jeans rang true, the mortgage was still a mystery.
Monthly budgeting and purchasing a car were always quite clear in my father’s lessons. However the elusive mortgage never quite made sense. Fast forward 25 years. My husband and I were successful in some areas of personal finance, but we took a beating in the property arena. Owning property has just never been our forte and we’ve never come out ahead when selling property. Whether it was timing or other factors, there was never a pot of gold at the end of the selling rainbow for us. So when we realized we were going to be staying in Switzerland for the long term, we also realized that we needed to investigate the possibilities of purchasing an apartment or house. This time we wanted to get it right and actually understand the mortgage process.
The fact that made us realize that owning a home in Switzerland was going to be very different than in the US was learning that mortgage interest in Switzerland involves a simple interest calculation. In the US, when you calculate monthly payment for your mortgage, there is a very complicated calculation which takes into account compound interest. So much so, that when you visit the bank to learn about a possible mortgage, they need to use a special calculator to be able to figure out your monthly payments.
Wikipedia says Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
In a nut-shell, compound interest is terrible! When we explained compound interest mortgage calculations to our Swiss banker, he was absolutely shocked. We always have something about American banking that stuns our Swiss banker.
I’m going to get a little math teacher on you now, but I think it really helps make the point. (I need to point out that this was our personal experience, and I'm sure others have had a different experience. Therefore, take everything that follows with a grain of salt because as one kind Facebook reader pointed out, I am a special needs consultant, not a banker. Onward!) As for Swiss mortgages, they are calculated as simple interest. For example, let’s say you are buying a house for $100,000 and your interest rate is 1% (yes, that is actually a little higher than the typical rate in Switzerland right now!). Your monthly payment is calculated as:
$100,000 x .01 = $1,000
$1,000/12 = $83 a month is your mortgage payment.
Yes, you read that right. There is amortization as well, however, you are only required to reach 33% equity in the home by the 15th year of ownership. So after putting the required 20% down, over the next 15 years, another 13% of equity must be paid down in the mortgage.
In this case, if the minimum of 20% down was placed on the $100,000 home, the mortgage would be calculated on the remaining $80,000. Then within the first 15 years, another $13,000 must be paid down as well. Unlike the US, the goal in Switzerland is not to pay off your home completely. It is a huge tax savings to continue to pay interest on your home, so most people, even those heading to retirement, want to keep a small mortgage .
I know, mind blown! After we both fully understood this calculation and that there weren’t any hidden costs, we knew we needed to start down the path of finding a home to purchase.
We have already learned so much about the Swiss system for purchasing a home, but I’m sure this is only the tip of the rooftop. We’re hopeful that this time around, we’ll be more successful homeowners. Those lessons from my father will always remain, but the basic mortgage system in Switzerland is remarkably simple compared to the US. Now, as I explain it to my father, he is still in disbelief! It wouldn’t have taken so many hours hovering over the spreadsheet if the US mortgage system was more like the Swiss.
April Remfrey is an American special needs consultant living and loving life in Switzerland. April helps globally mobile families as they search for the best school for their child with special needs. www.remfreyeducationalconsulting.com