Repaying a loan in CHF and currency exchange? What you need to know!
We are receiving an increasing number of enquiries regarding the repayment of foreign currency loans by private customers who have purchased property valued in euros. The exchange of substantial sums requires careful research to find the best solution at the most favourable rates. As they become better informed, the private customers concerned are seeking alternative currency exchange solutions such as b-sharpe.
• A foreign-currency loan finances a property outside the CHF zone using Swiss income, converting the amount into CHF when the contract is signed and repaying monthly in francs.
• The exchange rate applied is based on the interbank rate plus the margin set by the bank or intermediary.
• On large amounts (often several hundred thousand euros), even a small rate fluctuation can have a significant financial impact.
How does a foreign currency loan work?
To fully understand the issue, it is important to understand how a foreign currency loan works.
A foreign currency loan is financing in Swiss francs offered to individuals with income from Swiss sources in CHF who wish to invest in a property that is not valued in Swiss francs. These loans are offered either by Swiss banks or by European banks, in particular certain French banks in the Franco-Swiss border area (Crédit Agricole, Crédit Mutuel, Caisse d’épargne, Banque Populaire des Alpes).
When the property loan is finalised, the bank arranges the financing on the basis of an exchange rate: the amount in euros needed to complete the foreign currency loan is then converted into Swiss francs, and it is on this basis that the repayment schedule is drawn up, resulting in repayments in CHF for the customer.
At the time of resale, the reverse operation takes place: the amount from the sale of the property, in euros, must be converted into Swiss francs in order to repay the property loan, which is itself in Swiss francs.
How is an exchange rate determined?
Another mechanism that is important to understand in order to grasp the challenges of repaying a CHF loan is how an exchange rate is set. The exchange rates offered by financial institutions and currency intermediaries are based on reference rates, namely interbank exchange rates. These interbank exchange rates can potentially change at any moment for each currency pair, and each intermediary or bank adds its own margin to arrive at the exchange rates it offers its customers.
This margin is a commercial decision, a choice. It is generally expressed as a percentage, and the higher the percentage, the more commission the intermediary takes, and the less favourable the rate is for the customer.
Substantial amounts that call for vigilance regarding the exchange rate applied
In the case of repaying a property or mortgage loan, the amounts involved are generally high, and it is not uncommon to be talking about several hundred thousand euros to be exchanged into Swiss francs.
You will understand, in this case, that the exchange rate used for the conversion is essential, and that even a small variation can have a significant impact on a large amount.
For many financial intermediaries (including banks), the larger the amount, the lower the margin should, in principle, be, in stages. Unfortunately, this is not always the case, and some institutions apply high margins to their retail customers.
To put it simply, ask your intermediary whether the rate applied to exchange an amount of CHF 5,000 is the same as the one applied to exchange the amount you want to exchange to repay your loan. If the answer is yes, then there is a problem, and probably a risk that you will be charged a very high rate.
An example to help you understand the impact of the exchange margin
A retail customer needs to repay CHF 200,000 to their bank to repay their foreign currency loan. They must therefore exchange the corresponding amount into EUR. We have simulated several amounts to be repaid depending on the margin applied by the bank.
The reference EUR/CHF exchange rate, as determined by the market, is 1.12377.
- Case 1: the bank applies a margin of 1.5%. The exchange rate offered is therefore: 1.12377 / (1+1.5%) = 1.12377 / 1.015 = 1.10716
So, to receive 200,000 Swiss francs, you would need to provide 200,000 / 1.10716 = €180,642.36 in this case - Case 2: the bank applies a margin of 0.75%. The exchange rate offered is therefore: 1.12377 / 1.0075 = 1.115404
So, to receive 200,000 Swiss francs, you would need to provide 200,000 / 1.115404 = €179,307.22 in this case - Case 3: the financial intermediary applies a margin of 0.50%. The exchange rate offered is therefore: 1.12377 / 1.005 = 1.118179
So, to receive 200,000 Swiss francs, you would need to provide 200,000 / 1.118179 = €178,862.23 in this case - Case 4: the financial intermediary applies a margin of 0.25%. The exchange rate offered is therefore: 1.12377 / 1.0025 = 1.120967
So, to receive 200,000 Swiss francs, you would need to provide 200,000 / 1.120967 = €178,417.38 in this case
There are two observations to be made:
- The difference between the highest margin (1.5%) and the lowest (0.25%) is just over €2,200.
- The higher the bank’s margin, the higher the amount to be provided in EUR, for the same amount to be repaid (200,000 Swiss francs).
This example clearly illustrates what is at stake with currency exchange: you need to be vigilant about the exchange rate that will be applied to such an amount. Find out more and ask your bank, currency exchange office or online intermediary about the fees and margins they apply.
How to exchange currency somewhere other than your bank to repay your CHF loan?
The question that then arises is the following: can you exchange currency somewhere other than your bank as part of repaying a foreign currency loan? The answer depends on a factor we have not yet discussed: the type of security you have for your foreign currency loan. The security is what allows the bank to ensure it can recover the property in the event of default on your part.
There are several types of security, but 3 are mainly used in the context of foreign currency loans:
- The surety company (used in more than 90% of cases)
- The lender’s privilege (PPD)
- The mortgage
Where your foreign currency loan is guaranteed by a surety company
You are entirely free to exchange your euros wherever you wish, and the bank has no say in this transaction. Your only obligation is, of course, to repay the loan to the bank after the sale of the property.
Please note: in practice, we have found that customer advisers sometimes incorrectly state that it is not possible to exchange currency anywhere other than at the bank.
Where your foreign currency loan is guaranteed by a lender’s privilege or a mortgage
The notary will have carried out a mortgage search beforehand and will know the amount corresponding to the security at the time of the sale of the property.
In this case, they will send the bank the corresponding amount in euros, generally with a safety margin to cover exchange rate fluctuations. The bank will handle the exchange on your behalf, on the terms it chooses.
It should be understood that the bank is in a position of strength here, since you have no choice but to go through it. It can therefore impose whatever margin it wants.
How to still save a little on a transaction involving a “lender’s privilege” or “mortgage” type of security
On the other hand, if the resale amount is higher than the amount of the security, it is still possible to recoup the difference if you wish to exchange the amount into CHF. In this case, the notary will send the difference to the account of your choice.
