Equity: the 20% rule and where the funds can come from

When someone talks about buying a flat or a house, the question of equity comes up almost immediately — after the price, before the interest rates. Yet it is often the deciding factor. Swiss banks generally require at least 20% of the purchase price in equity. On a property at CHF 850,000, that means CHF 170,000 to assemble before even thinking about the mortgage. Where does that money come from, in what form can it arrive, and what constraints should you understand before going further? That is what this chronicle sets out to clarify.

The 20% rule

The 20% equity threshold is not an arbitrary banking requirement: it stems from the guidelines of the Swiss Financial Market Supervisory Authority (FINMA) and the self-regulatory rules issued by Swiss banking associations. In practice, a lender may finance at most 80% of the pledging value of a property — that is, the value the bank recognises, which may be lower than the negotiated price.

What is less widely known is that these 20% cannot all come from the same source. The rule specifies that at least 10% of the purchase price must come from what banks call "hard equity" — meaning assets that have not been withdrawn from the second pillar (occupational pension). This distinction has significant implications for planning a purchase.

Where equity can come from

The accepted sources are more varied than is often assumed. The essential requirements are that they are traceable, documented, and free of any encumbrance at the time of signing before the notary.

• Personal savings: current accounts, savings accounts, and realisable securities portfolios. These are hard equity in the purest sense — they count in full towards the mandatory 10% tranche.
• Pillar 3a (tied pension savings): assets accumulated in a pillar 3a account or tied insurance policy may be used to purchase a primary residence. They fall within the category of hard equity.
• Second pillar (occupational pension fund): through what is known as the home ownership promotion scheme (EPL), it is possible to withdraw some or all of your pension assets, or to pledge them. Note that second-pillar assets can only cover the second tranche of equity, beyond the 10% hard equity requirement. They are useful, but insufficient on their own.
• A gift or advance on inheritance: a sum transferred by family members is accepted, provided the bank has proof and the gift is clearly documented. A loan agreement between the buyer and their parents, however, is not treated as equity — it is an additional liability.
• Proceeds from a sale: if the buyer sells a property, a vehicle, investments, or a business, the net proceeds of that transaction may constitute equity.

The second pillar: useful, but regulated

Withdrawing pension fund assets is a decision that warrants careful thought. On one hand, it allows you to reach the equity threshold when personal savings fall short. On the other, it reduces your future pension and, in certain cantons, triggers a tax at the time of withdrawal — calculated separately from income, generally at a reduced rate, but a real one nonetheless.

There is an alternative to withdrawal: pledging. The second-pillar assets remain in the fund but serve as additional security for the bank. The future pension is not reduced, but in the event of default the fund would be required to repay the pledged amount. This option is often overlooked, yet it deserves careful comparison with the withdrawal route.

Another constraint that is frequently missed: if you have made an EPL withdrawal and later sell the property, you are in principle required to repay the withdrawn assets to your pension fund — unless you have already reached retirement age or are purchasing a replacement property within the same period. The precise conditions depend on your situation and your fund: a pension adviser or your fund directly will be able to confirm them.

Purchase costs: do not overlook them

A point that buyers sometimes discover too late: purchase costs are added on top of the equity — they do not replace part of it. In the canton of Vaud, these costs — property transfer duties, land register fees, notary fees — are borne by the buyer as a matter of custom. You should generally allow 4 to 5% of the purchase price to cover them all.

On a purchase at CHF 850,000, that represents between CHF 34,000 and CHF 42,500 in additional funds, on top of the CHF 170,000 in equity. These costs cannot be financed by mortgage. A bank may factor them into its affordability calculation, but it does not finance them directly. They must be available as liquid funds at the time of the notarised deed.

Consider a typical case: a couple buying a flat in Lausanne for CHF 900,000. They need at least CHF 180,000 in equity, of which CHF 90,000 must be hard equity, plus around CHF 40,000 for purchase costs. That is close to CHF 220,000 to mobilise before the keys change hands. Understanding this timeline early — ideally a year before the purchase — leaves time to weigh up the right balance between savings, pillar 3a, and a second-pillar withdrawal.

Equity and affordability: two separate calculations

Having the equity is not enough: the bank also assesses your repayment capacity. It calculates what is known as the theoretical affordability cost — interest calculated on a conventional rate (often set at around 5%, regardless of the market rate at the time of purchase), amortisation of the second-ranking mortgage over fifteen years at most, and estimated maintenance costs. This charge must generally not exceed one third of the household's gross income.

It is this dual filter — equity and affordability — that determines whether a property is within reach. Both conditions must be met simultaneously. Some buyers have the equity but not the affordability, or the reverse. Taking stock early, with the relevant documents, avoids visiting properties that are out of reach — or missing out on one that is accessible simply because you did not know you qualified.

Our affordability calculator provides a first estimate in a few minutes. To go further, the Buyer Passport formalises this work: financing capacity is verified with supporting documents and confirmed by Alexandre before the first viewing. This changes how a buyer is positioned in a negotiation.

Equity is not simply a percentage: its origin matters as much as its amount, and purchase costs are added on top — not included within it.

Every situation is different. Age, household composition, assets in each pillar, the target commune, the share of savings available in the short term: all of these affect the calculation. If you are mapping out your project, the right time to discuss it is not the day before signing, but well before — when there is still time to make considered choices. Alexandre can review this with you, without any obligation, so that you know exactly what you can rely on.