How do I buy property in Switzerland?
To purchase a property in Switzerland, you will need to obtain a loan from a financial institution, called a "mortgage". To do this, you must contribute 20% of the property's purchase price. This 20% is called "equity", and it can come from the LPP/BVG, 3rd pillar A or B, and personal savings. However, only 10% of the equity may come from the 2nd pillar.
Pillar 3a or 3b to finance a property purchase?
It is possible to use both pillar 3a (tied individual pension provision) and pillar 3b (flexible individual pension provision) to finance the purchase of real estate. However, it is important to note that pillar 3a can only be used to finance a property for personal use, meaning a primary residence, while the pillar 3b can be used to finance any type of property: holiday homes, investment properties, etc.
This is due to the fact that 3a is primarily designed to guarantee a comfortable retirement, and therefore withdrawal options are more limited.
3rd Pillar A funds can be used for:
- Buying or building a home for own use.
- Pay off an existing mortgage.
- Acquire shares in a housing unit for own use (e.g. cooperative).
Financing my primary residence with 3a
There are two ways to use your Pillar 3a assets to finance the purchase of your principal residence in Switzerland.
Early withdrawal (EPL)
Under the home ownership promotion scheme (EPL), you can request a partial or full withdrawal of your capital from pillar 3a (no minimum amount is required) to constitute your down payment. This is only permitted if the capital is used for the purchase or construction of your primary residence.
The withdrawal is taxed at one-fifth of the regular tax rate, separately from your income, and you can carry out this process no more than once every five years.
Pledging
Instead of withdrawing your savings, you can pledge them to the bank in order to obtain a larger mortgage loan. This mechanism increases your borrowing capacity while retaining the tax advantages and returns of your pillar 3a, without triggering immediate taxation. In return, the pledged amount must be repaid later when repaying your mortgage or at retirement age, as part of an indirect amortization plan.
Pledge or early withdrawal?
- Benefits
- Disadvantages
- Early withdrawal
- Reduces mortgage debt
- Reduces interest expense
- Capital tax at time of withdrawal (reduced rate)
- Decrease in Pillar 3a assets
- Pledging
- Capital continues to grow
- No tax on capital benefits
- Higher interest expense
- Higher indebtedness
Until when can I withdraw funds from Pillar 3a?
You can withdraw your pillar 3a assets up to five years before the statutory AVS retirement age, that is at 65 years old (currently 64 for women). After this deadline, your entire pillar 3a balance can only be received in a single payment, meaning the full amount available in your pension account or deposit.
Should I use 3rd pillar funds for a property purchase?
For the purchase of your principal residence, opt first for pillar 3a, which allows either an early withdrawal (to build up the downpayment or amortize the mortgage), or a pledge (to increase your borrowing capacity) while benefiting from tax advantages.
If you need cash for a second home (vacation home) or a capital goodsPillar 3b can supplement your equity capital. However, it has fewer tax advantages and cannot be pledged like pillar 3a.
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