Swiss Franc Loans

Most homebuyers that take out a mortgage in a foreign currency are  lured by lower interest rates however it is imperative that an investor understands the currency risk involved. Borrowing cheaply in one country to invest in a higher-yielding asset somewhere else is known in banking circles as the "carry trade;" the difference between two interest rates is the "carry." Currently volatility among currencies is near historic lows, reducing the apparent risk. Large investors and institutions can buy derivatives to offset currency risk on large international transactions, whereas that option isn't available to most individual homeowners with their much smaller loans.

Swiss banks do not usually lend money in the form of a mortgage for foreign property. They consider taking a charge on foreign property too risky because they do not have the necessary local knowledge and also if a customer were to default on a mortgage it would be uneconomical to recover the money. The Lombard loan is a solution for customers with enough equity to invest in Switzerland.

What is a Lombard loan?

A Lombard loan is available in the form of a lump sum and like a mortgage you can fix the interest rate for an agreed period. The minimum credit limit is around SFr 100,000. But you can also secure a current account loan, which works like a conventional credit line. In this case you pay interest only on the amount of credit that is actually used, and a commission is often charged in addition to interest. The minimum credit is around SFr 30,000. Assets on deposit in a bank – such as equities, bonds, life insurance policies – are held in safekeeping (pledged) and can be readily borrowed against – with the assets as collateral – in order to cover financial shortages without having to dispose of the investments. The result is known as a Lombard loan, and is often used to bridge personal or business financial shortfalls. So the Lombard loan is a credit designed to cover liquidity requirements by pledging your securities in safekeeping and/or your account balance. The Lombard loan will equate to a percentage of the market value of the assets. The loan-to-value ratio depends on the type, currency, quality and tradability of the securities and is reviewed periodically. For example, for a portfolio comprising of mutual funds a bank will lend you around 60% of the portfolio value. The composition of your safekeeping account also plays a role. If the value of the assets held in your safekeeping account drops significantly, you must provide additional liquid assets or reduce the amount of the loan accordingly. This can cause major problems if the investor used the Lombard to purchase additional equity investments. This is known as leverage. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would have otherwise been. Leverage magnifies both gains and losses.

Summary of a Lombard loan:

• You profit from the return on your securities, yet also have additional capital at your disposal.
• You continue to receive the dividends and interest income generated by your assets held in safekeeping.
• You can undertake portfolio adjustments as you wish; the loan-to-value ratio will be modified accordingly.
• You can request a Lombard loan in Swiss francs or in a major foreign currency.
• If you pay tax in Switzerland most Swiss Cantons permit the interest paid to be deducted from taxable income.
• You have the freedom to use the loan for whatever you desire, to increase the level of an investment, to buy a house abroad or even for a boat, a car or travel.