Swiss banks move to cool investment property market

Swiss banks have agreed to tighten lending conditions for people buying property as an investment rather than to live in. This follows a warning shot from the financial regulator that the market is over-heating.

The Swiss Bankers Association (SBA), which represents the vast majority of mortgage lenders, said it is enhancing self-regulatory measures for its members. People purely investing in bricks and mortar must now stump up at least 25% of the value of the loan as a down payment before they can get a mortgage. In addition, they must re-pay a third of the loan within ten years.

People buying a home to live in (owner-occupiers) remain subject to similar, although less demanding, mortgage loan requirements drawn up by the SBA in 2012.

Rising property prices have for some years raised concerns of a bubble that could burst with disastrous consequences. Last year saw the value of domestic mortgage loans breach the CHF1 trillion mark for the first time, driven in large part by the increasing trend of investors putting their money into bricks and mortar.

The Swiss Financial Market Supervisory Authority (FINMA) gave a cautious welcome to the SBA’s revised code of conduct for issuing loans. But it raised concerns that the buy-to-let segment, making up a quarter of investment properties, could slip through the net because of an apparent loophole in the wording of the rules.

In April, FINMA warned that banks could be forced to set aside yet more capital to cover the risk of loans defaulting. The so-called counter cyclical buffer, imposed in 2013 and increased a year later, currently forces banks to set aside CHF2 ($2) for every CHF100 they issue as mortgage loans.

To reduce the risk of this buffer being increased to 2.5%, the SBA has heeded FINMA’s warning. But FINMA says it will remain vigilant and take action against any banks that exceed safe lending limits.