Refinancing a foreign currency mortgage: 5 tips for success

Here are 5 tips to help you stop paying your monthly instalments in foreign currency, avoid all the pitfalls of the mortgage refinancing process, and find the best deal on the banking market.

#1 Ensure that the loan can be refinanced

Before you even consider optimising your foreign-currency mortgage refinancing, you first need to make sure it’s actually possible! The first thing to do, therefore, is to check whether this is the case.

To do this, the outstanding balance of your loan is compared with the original loan amount. If the former is higher than the latter, then no bank is permitted to buy back your loan.

Generally speaking, the calculation carried out by banks involves several steps:

1. estimate of the initial loan amount;
2. an estimate of the amount of the loan to be refinanced (including all associated costs);
3. conversion of this amount;
4. a comparison between these two values;
5. approval or rejection of the loan buyback.

Please note: As the amounts are converted from CHF to EUR, you should take the exchange rate risk into account in your calculations!

Therefore, the larger your initial deposit, the lower the amount on which your interest rates will be calculated, which will make it more likely that a rival bank will agree to the refinancing.

#2 Find out the term of the new mortgage

To conclude this first point, many people might be tempted to wait longer in order to ensure their mortgage refinancing application is approved: this would be a mistake! It is estimated that, to be worthwhile, a refinancing deal must be for at least €70,000. Therefore, generally speaking, the remaining term must be longer than the time you have already spent making monthly repayments to your original lender.

Generally speaking, the ideal time to negotiate the refinancing of a foreign currency mortgage is no later than one-third of the total repayment term. To determine the appropriate timeframe for your specific situation, it is best to consult the repayment schedule provided by your bank when you took out the mortgage.

Despite this, most refinancing arrangements will involve shortening the original repayment term. This approach effectively reduces the amount of interest you have to pay and depends on the level of debt you can comfortably manage. As a reminder, this should not exceed 33% of your income.
Please note: in certain exceptional cases, this term may be extended!

#3 Calculating early repayment penalties

When you transfer your loan from one bank to another, the original bank will charge you early repayment penalties. These are calculated on the basis of your outstanding loan balance and may not exceed 3% of that amount or six months’ interest at the average rate.

However, to confirm these calculations, please check the relevant terms and conditions in the agreements you have signed with your lender. Depending on your customer profile and the amount of the penalties, these may be incorporated into the new loan.

#4 Anticipate additional costs

Two factors that often take borrowers of foreign-currency mortgages by surprise are:

• the new bank guarantee;
• the new mortgage insurance.

In the case of a cross-border borrower (i.e. a loan in a foreign currency), the choice of bank guarantee is either a mortgage or a guarantee company. In any case, these additional costs must be factored into your budget!

The cost of mortgage insurance, meanwhile, depends largely on your age and state of health. Borrowers are often surprised by the difference in cost between their first and second policies. It is highly likely that when you refinance your foreign currency loan, you will be in a different age bracket, which will result in higher costs…

These costs will be added to the final monthly payment and are in addition to one-off charges such as application fees (€800 on average).

#5 Analysing the market

Once you have these details, it’s time to research what’s available on the market, after which you can put together a comprehensive dossier ahead of any meetings.

A proper application must include, in particular:

• a valid form of identification;
• proof of address (utility bill, rent receipt, etc.);
• your employment contract;
• your bank statements for the last 3 months;
• your latest tax assessment;
• your latest property tax bill;
• your family record book;
• the repayment schedule for the original loan.

As refinancing a foreign currency mortgage involves higher costs, take the time to compare offers from other lenders. It is estimated that unless the interest rate is reduced by at least 0.7%, the savings made will not be enough to cover the application fees, guarantee fees and early repayment charges charged by the original lender.

Once you have made your decision, the new lender will check:

• your personal circumstances;
• your employment status;
• your family situation;
• your financial situation.

This is where a well-prepared application will make all the difference, alongside a stable income and consistent management of your savings. Your creditworthiness (and acceptable debt-to-income ratio) will be assessed at this stage. If the new loan agreement is signed, the loan will then be bought out directly by your new bank from your old bank.

You now know everything you need to know to successfully refinance your foreign-currency mortgage. However, it is worth gaining a more comprehensive understanding of the specific aspects of buying property in Switzerland to ensure your investment project is a success!