1st and 2nd tier mortgage

If you want to take out a mortgage, sooner or later you will come across the terms “1st mortgage” and “2nd mortgage” during a consultation with your advisor. Have you ever wondered what this is all about? Or do you already have a mortgage and assume that you are already very familiar with the subject? Then test your knowledge now and find out everything you need to know about these two terms in today’s blog post.

Splitting the purchase price into the 1st and 2nd mortgage

As part of the credit check, the bank divides the financing of a property into a so-called 1st mortgage and 2nd mortgage.

The 1st mortgage: up to 65% loan-to-value ratio

If you contribute 20% of your own funds to the financing, you have a classic financing structure with a mortgage of 80%. The mortgage is divided into the 1st and 2nd mortgage. The 1st mortgage is the loan amount up to 65% of the market value of the property. This part of the mortgage does not necessarily have to be amortized (repaid).

The 2nd mortgage: up to 15% loan-to-value ratio

In the above example, the difference from 65% to 80% is the so-called 2nd mortgage and therefore 15% of the market value. This is the sum in Swiss francs that the customer must repay to the bank over a period of 15 years (amortization), which can be paid directly or indirectly. You can find out more about this in this blog entry.

Special case: Pure 1st mortgage financing

If you already have 35% or more equity at the start of the financing, you start directly with only a 1st mortgage and there is no amortization obligation towards the bank. From the bank’s point of view, this type of financing is very welcome, as it involves less risk due to real estate price corrections. There are banks that pass on this lower risk to customers in the form of better interest conditions. If you have more than 20% equity, it is always worth calculating the scenario with your advisor. Depending on the case, the improved interest conditions may be so attractive that it may be worthwhile to contribute more than the 20% equity.

Frequently asked question: Is there a difference in interest rates between the 1st and 2nd mortgage?

No. Nowadays, banks no longer differentiate between the interest rate offered on a 1st or 2nd mortgage. It used to be common for the bank to charge a risk premium for the 2nd mortgage. Nowadays, the bank issues a standardized interest rate offer for the entire mortgage amount, which simplifies the calculation for customers and keeps the costs correspondingly lower.

Do you have any questions about mortgages? We will be happy to help you.