Freehold home ownership, in which you fully own both your home and the land it is built on, is the least complicated form of home ownership. When most people think of owning a home, freehold ownership is what comes to mind.
While many Swiss homes are sold as freeholds or condominiums, leaseholds have become increasingly widespread. One reason for this is the fact that property prices in Switzerland are very high, and buying or building a home on leased grounds is more affordable than buying a freehold home.
What is a leasehold?
In a leasehold, a landowner allows you to build or own a building on their property in exchange for a regular fee. In other words, you lease the ground on which your home is built. You own the actual building that makes up your home, but you do not own the land it sits on.
This means that the land and the building are considered two different entities in terms of ownership. In Switzerland, ground lease terms normally range from 30 years to 100 years. At the end of each term, you as the lessee will have to renegotiate your lease with the lessor.
How a leasehold affects your home ownership
Swiss land rights laws give you as lessee the right to sell your home by transferring ownership of the building to a new lessee. Your leasehold can also be passed on to your heirs. However, the new lessee will have to abide by the terms and conditions of the lease agreement. When the lease term is over, the new lessee will have to negotiate a new agreement with the landowner.
Are there any benefits to buying a home as a leasehold?
Buying a home built on leased property can seem like a real bargain because the cost of the land isn’t included in the purchase price. In some municipalities, freehold properties are scarce, with large tracts of residential property held by land ownership corporations which have no intention of selling their valuable property.
Because of this, a ground lease can make buying or building a house possible in towns or areas where you may otherwise find it impossible to buy a home.
Another argument in favor of a leasehold is that the initial cost of buying a home is much lower. With building land prices reaching well above 1000 francs per square meter in many of the more desirable Swiss regions, knocking the cost of land off of a home’s price can make owning your own home a less impossible dream.
For example, a home built on a 200 square meter plot valued at 1000 francs per square meter would, technically, cost 200,000 francs more as a freehold than it would cost as a leasehold. In reality the differences in cost between freeholds and leaseholds can be larger than the simple cost of the land.
What are the disadvantages of buying a home as a leasehold?
The obvious disadvantage is that you do not actually own your home. Because you do not own the land, you do not profit from increases in property prices. In fact, quite the opposite is true because higher property values can lead to your lessor charging higher lease rates (more on this below).
A quick look at the way that property prices have developed shows that land value increases are one of the primary financial benefits of home ownership. For example, the average square meter of building land in Urdorf, a town near Zurich, sold for just 100 francs in 1979. In 2014, the same square meter of land sold at a median price of 1400 francs. That is a 1400% increase over just 36 years.
When you own a leasehold, you do not see benefit from increases in land prices at all. If the property is located in an area with a strong demand for housing and high property liquidity, you may still be able to make a profit on the sale of the actual building, which is the part that you own.
However, leaseholds are unpopular among buyers, so long sale cycles are common. Buyers usually have no guarantee that the lessor will renew the lease, and leases can be expensive. For these and other reasons, many home buyers steer clear of leaseholds altogether.
Because actual buildings generally decrease in value over time (unlike land), there is also a chance that you could make a loss when you sell your home. If you plan to live in your home permanently, value increases may not be a concern for you. But you will still need to consider interest rate.
The interest which you as the land lessee pay to the landowner over the duration of your lease is, by far, the biggest disadvantage of a leasehold agreement.
Another disadvantage is that mortgage providers are, understandably, quite skeptical of mortgage applications for leaseholds. Because you can only mortgage the property, and not the land itself, a mortgage on a home built on leased ground does not make good collateral.
For obvious reasons, many Swiss banks refuse to provide home loans for leaseholds, although there are some banks which will. In any case, affordability and debt-to-income ratio requirements will normally be higher than those for freehold mortgages.
What are ground lease rates?
When you enter into a lease agreement, you agree to pay a regular fee in exchange for the use of property. In the case of land leases, the interest which you pay is normally proportionate to the value of the land.
If your interest rates are fixed, you get the same rate over your entire lease term. In this case, you will normally pay a higher interest rate but you have the comfort of knowing that your rate will remain the same. This makes it much easier to calculate the total cost of owning your home over the lease term.
Example: You buy a leasehold property built on a 200,000-franc plot, and the landowner charges a fixed lease rate of 5% per annum, you will pay around 10,000 francs per year for your lease. Over a 30-year lease term, you would pay 300,000 francs to lease the land which your home is built on. If the land’s value were to unexpectedly double every 10 years, you would come out on top because your rate is fixed to the land value at the start of your lease.
Most lessors demand a variable lease rate. With a variable rate, the amount you have to pay every year can change as property prices increase or decrease. This can work out cheaper than a fixed rate if the value of the land does not increase.
However, decreases in land value are extremely rare in Switzerland, and as the value of the property goes up, the amount of interest you pay will go up to. While in the past, variable land lease rates often followed mortgage rates, the unstable growth in mortgage rates over recent years has led many lessors to fix lease rates to more realistic indexes, such as the Swiss Consumer Price Index.
If the value of Swiss building land continues to climb at the rates we have witnessed over the past 30 years, you could easily end up paying a very rate as your lease progresses.
It is also worth noting that in Switzerland, landowners have the right to claim a deposit from lessees. This deposit may be as high as 3-years’ worth of annual interest.
What happens to my home at the end of the lease term?
Your lessor may decide to extend your lease at the end of each term. However, they may also decide not to extend it. In that case, ownership of your buildings is transferred to the landowner (unless you can move them off the leased land). However, the lessor is required to provide adequate compensation up to the building’s estimated value.
Is a leasehold worth it?
If you are looking at buying a home as an alternative to renting a home, a leasehold can sometimes be worth the cost. This is especially true when you have a large sum of money on hand and can pay for a home out of your own pocket.
When calculating whether a lease may work out cheaper than renting, it is important to account for the cost of the lease payments (taking rate increases into account), including the deposit. You must also add the cost of a down payment plus mortgage interest and amortization payments (if you use a mortgage to finance your home). You should also assume that your building will lose value as time takes its toll and you get closer to the end of the lease term.
But unless you sell your home shortly after buying or building it, the leasing costs will eventually surpass the value of the land, especially over a long-term lease. For example, a 50-year lease on a 150,000-franc piece of land at an average rate of 3% per annum will cost you 225,000 francs over the lease term, and the land still will not belong to you!
This can make leaseholds a very expensive bargain. Unless it isn’t possible to buy a freehold home in the location of your choice, you will almost always come out better by buying the land.
In the example above, you may pay 150,000 francs more to buy the home along with the land, but you would save 75,000 francs in lease charges over the long term, and you would also have the land – which you can sell at a profit after it gains in value.