Migros launches mortgage loans with 10% deposit in Switzerland
Buying a house in Switzerland is difficult. Homes are expensive and loans are generally limited to those with a 20% deposit and significant income. Migros Bank, a subsidiary of the Swiss supermarket, recently launched a product that reduces the deposit requirement to 10%.
Migros Bank launched the new product under the Cactusus brand. According to the bank, 9 out of 10 Swiss households cannot buy because they do not meet Switzerland’s rigid financing requirements, which require a 20% down payment.
Lending rules in Switzerland are set by FINMA, the Swiss banking regulator. The strict Swiss credit rules have been a bone of contention for banks and borrowers for some time. FINMA issues banking licenses and can sanction license holders who do not comply with its requirements. In extremis, he can withdraw a license.
Individuals in Switzerland are heavily indebted. With an average debt of 222% of net disposable income, Swiss debt was ranked 4th among OECD countries in 2020. Much of this debt is made up of mortgages used to buy homes. Real estate prices are also high, with an average 4-bedroom home costing over CHF 800,000.
FINMA’s lending restrictions are intended to avoid the structural financial risks that come with excessive borrowing in a tight, high-priced housing market. Inevitably, this would not sit well with buyers and banks looking to expand their mortgage business.
However, Migros Bank seems to have found a way around the 20% deposit requirement. Instead, borrowers deposit 10% and Cactus provides the remaining 10% in the form of a subordinated loan. In the event of default by the borrower on the loan, the 10% invested by Cactous would only be reimbursed after the entity lending the first 80% had been paid. This means that the 80% mortgage component would be exposed to the same level of risk under the current system.
As is the case with such things, there is no free lunch. In return for setting up the 10% subordinated loan, Cactous makes it a turbo yield of 5%, a rate well above current market interest rates. Combined together, the overall mortgage interest rate could be 10-15% higher than a normal market rate mortgage.
In fact, overall it’s a more expensive mortgage with compartmentalized risk tranches. Previous experiments with such structures led to a boom in slicing and dicing of mortgage-backed securities in the 2000s, which contributed to a financial meltdown.
Mortgage-backed securities take pools of mortgage assets and sell shares in the pool. These pools can be sliced and diced to create units of varying levels of risk and returns. While the riskiest stocks offer the highest returns, they are the first to be hit. The problem with this slicing and dicing is that it can concentrate risk. An entity with too much exposure to risky tranches could encounter financial difficulties in a bear market.
FINMA will need to ensure that Cactus has a strong enough balance sheet to absorb the higher risks associated with its subordinated loans. However, those assets could still be packed to find a home elsewhere. This happened last time, inflicting financial hardship on many unsuspecting investors.
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