Eigenmietwert removal – a danger for Swiss Banks?
The consensus till now is that it is a bad idea for individuals to buy property in Switzerland, as it is expensive, and with ownership you are “punished” by the imposition of an “Eigenmietwert” (Imputed rental value). How this uniquely Swiss system functions is that the use of land and or real estate by the owner is regarded as a benefit in kind and thus as income by the revenue authorities. In order to determine this amount, the treasury uses the potential income that the owner would have earned by renting out the object to a third party. This amount is then called the imputed rental value. For example if you buy a home that can be rented out for 2’000 CHF a month, a massive 24’000 CHF (12*2’000 CHF) “virtual rent” is added to your taxed income. People see this as a punishment for owning a house.
On the other hand, Switzerland is very renter friendly.
Because of “Eigenmietwert“ probably 100% of property in Switzerland has a mortgage, and if you are an owner of a house without a mortgage, you pay much more taxes because of this. As a balance to the Imputed rental value, property owners can deduct interest on debt.
Naturally if 100% of property is under a mortgage, this is good for the banks.
Other laws also put a brake on property speculation and flipping.
People believe that Switzerland deincentivizes people from buying real estate and incentivizes them to put money on the stock market. The returns are much better on the stock market. However there are enough property owners that most banks exist because of their earnings from this lending.
An initiative from the government of Switzerland has the potential to fundamentally change the structure of the Swiss mortgage market.
The government is considering ending the eigenmietwert system. This could hit domestic Swiss banks fairly significantly.
A new report from Moody’s has looked into this and concludes: For Swiss domestic banks, mortgages are at the core of their business model, accounting for more than 90% of aggregate loans.
Swiss banks benefit from the current tax regime on both sides of the balance sheet: Outstanding mortgage loans allow them to earn an interest margin on this exposure. At the same time, they manage the large financial assets of their clients, supporting the generation of fee and commission income.
Removing the mortgage interest tax deduction would encourage higher rates of amortization on mortgages. While this change in the tax regime would help to increase financial stability, it would have significant implications for the domestic banks' business model, pressuring its main revenue sources.
For property owners and potential owners the abolition of “Eigenmietwert” would only be interesting if the deductions were also allowed to remain. Abolishing “Eigenmietwert” and the deductions is 6 of one and half a dozen of the other, and in this case the status quo is probably better for the Swiss economy as a whole.
