How does a mortgage work?

How does a mortgage work?

Financing your property.


  • The mortgage corresponds to the capital that you must borrow for the purchase of your home.
  • To finance a property, you must provide at least 20% equity.
  • The first mortgage allows you to finance 65% of the purchase price. The second mortgage covers the remaining financing need.
  • You pay the lender annual interest, called mortgage interest, on the amount of the mortgage.
  • Real estate financing charges should not exceed 33% of your income.
  • Indirect amortization via life insurance can be judicious for the repayment of the mortgage.

A house with plenty of space or a panoramic roof terrace: whatever property you dream of acquiring, you must find the solution that suits you to finance it. But by the way, how does a mortgage work? And what is meant by mortgage interest? You’ll find here the answers to your questions.

What is a Mortgage?

The purchase of real estate involves the contribution of equity, but not only. In most cases, third-party funds are also required. This is called a mortgage loan or, quite simply, a mortgage. A lien on the property serves as security for the lender (usually a bank).

How much equity is needed for a mortgage?

To obtain a mortgage and finance your apartment or house in ownership, you must provide at least 20% of the purchase price in equity. That is CHF 160,000.– for a house whose current price is CHF 800,000.–. Rare are the people who immediately have such a sum. To realize your dream of becoming an owner, it is therefore recommended to build up capital early enough.


A maximum of 10% of the purchase price may come from occupational pensions (assets of the 2nd pillar); the remaining 10% must be financed by other means: savings, donations, or the 3rd pillar, for example. To cover the missing 80% of the purchase price, you must take out a mortgage.

What are first and second mortgages?

Typically, two mortgages are needed to finance one property. While the first mortgage finances 65% of the purchase price, the second mortgage covers the remaining financing requirement, i.e. a maximum of 15% of the purchase price. The second mortgage must in principle be repaid or amortized within 15 years or at the latest upon retirement.

What are the different types of mortgages?

A distinction is usually made between fixed-rate mortgages, variable-rate mortgages, and money market mortgages. All mortgage models have their specificities, with advantages and disadvantages. If the interest rate remains the same throughout the contract with a fixed-rate mortgage, it will fluctuate with a variable mortgage or a money market mortgage. Hence the difficulty of planning the costs of real estate financing in your budget.

Another specificity: fixed-rate mortgages and variable-rate mortgages are concluded for a fixed term. Unlike the variable rate mortgage, which can therefore be particularly interesting for anyone who wants to remain flexible and is planning to resell their property soon. In addition to your situation, the current market context can also play a determining role in the choice of mortgage.

 A mortgage to finance your property? We explain how it works.

What is meant by mortgage interest?

Mortgage interest is the amount payable to the lender for the amount borrowed. They must be paid at regular intervals. The amount of mortgage interest for variable-rate mortgages depends on the mortgage rate currently in force. Interest rates are just as volatile as the capital market. They are therefore updated regularly by mortgage lenders.

How much do I have to earn to be able to finance an apartment or a house?

The general rule is that you should allow 33% of your income to cover the costs associated with the property. These annual financing costs include in principle:

  • mortgage interest, calculated with a theoretical interest rate of 5% of the mortgage loan to secure the financing also in the event of an increase in interest rates;
  • the amortization, that is to say, the repayment, of the second mortgage;
  • ancillary costs, i.e. 1% of the purchase price per year.

Ask yourself beforehand if you can financially support a property. Our mortgage calculator will give you the first idea about it.

What are the options for repaying a mortgage?

As part of the direct amortization, you repay your mortgage loan to the lender in fixed monthly installments. But you can also repay your mortgage through retirement provision. You thus have the possibility of paying the annual amount of the amortization into life insurance. This indirect amortization allows you to benefit from tax advantages and insurance coverage for the duration of the policy.

Where can I find the financing I need?

Buying a property is an important life decision. And for many, a real obstacle course. Time and calm are therefore needed to find the right object and secure appropriate financing.

Your advisor will be happy to help you realize your dream of becoming a homeowner. We support you in all stages of real estate financing. With Allianz, you have an experienced partner at your side who will clarify all important questions for you.

By aamritri

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