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Wolfgang Müller
Nadja Lewandowski
In November 2023, the Swiss Federal Council adopted amendments to the Ordinance on the Capital Adequacy and Risk Diversification of Banks and Securities Firms (CAO; RS 952.03) that incorporate the final Basel III standards into Swiss law. These reforms will come into force on 1st January 2025 and will bring changes to the mortgage lending sector. In particular, there will be new classes of positions and increased capital requirements, weighted according to the risks presented by the financing transaction, depending on the type of property and its use.
The new amendments distinguish between owner-occupied, non-profit and commercial properties. Own-use residential property will generally benefit from lower risk weightings, as higher risk weightings will only be applied if more than 100% of the value of the property is pledged. A positive development concerns residential property owned by a non-profit institution, which will now also be treated as residential property for own use, thus facilitating its financing.
In contrast, the risk weights will increase considerably for heavily mortgaged residential properties with yield (i.e. over 60%). In particular, construction loans and loans for building land in the residential yield sector will be subject to a 100% risk weighting, starting from a loan rate of 70% of the value of the property. This represents a challenge for players in this segment, as the banks will have to raise more capital and therefore increase interest rates for customers in order to maintain their profitability. Like owner-occupied property, commercial property for own use will also be able to benefit from lower risk weightings, while heavily mortgaged commercial property with a yield (i.e. more than 80%) will be subject to higher risk weightings.
General impact on the mortgage market
Despite the new amendments, the industry and the Confederation do not expect the overall capital requirements to increase significantly or lead to major cost increases for bank customers. We would point out, however, that the profitability of loans will vary depending on the amount of collateral, the type of property and its use, which could influence banks’ behaviour.
The adjustments to the CAO could be particularly advantageous for borrowers in the financing of owner-occupied property and for public non-profit housing, since more favourable credit conditions can be expected in this area. Commercial properties for own use should also benefit from the new rules. However, existing investment properties and those under construction will be more difficult to finance, due to the increase in risk weightings, which could reduce margins and limit the volume of loans or, if margins remain unchanged, lead to an increase in financing costs. Even greater challenges are expected in the commercial property sector with yield, where not only will risk weightings increase, but where economic parameters (vacancy rates, stagnating rental income) may also be demanding.
Since the changes to the CAO will apply to new transactions, refinancing and variable-rate mortgages from 1st January 2025, property investors are advised to examine their current financing arrangements and those planned from next year onwards in the light of the new changes to the CAO and to restructure them if necessary.
