| RAMZI CHAMAT | OAKS GROUP SA
By 2025, the Swiss banking sector is preparing for the entry into force of strict new rules as part of the Basel III reform. Implemented by the Basel Committee on Banking Supervision, this reform aims to strengthen the stability of banks and the financial system by modifying in particular access to mortgage loans and the management of real estate assets. These changes will have a significant impact on owners, buyers and real estate professionals in Switzerland.
In 2025, the Swiss banking sector will adopt the new Basel III standards, a major reform aimed at strengthening financial stability. These changes will have significant implications for the real estate market, particularly by altering access to mortgage loans. The new requirements for capital reserves, interest rates, and risk management will affect homeowners, prospective buyers, and real estate professionals. This introduction outlines the context, challenges, and strategies to navigate this new financial environment.
Basel III is a set of international banking reforms developed by the Basel Committee to enhance the security and stability of banks worldwide. Initiated after the 2008 financial crisis, the goal of this reform is to improve banks' ability to absorb financial losses and better manage risks associated with their lending activities.
Basel III focuses on three main pillars: strengthening the capital adequacy ratio, introducing a higher leverage ratio, and establishing short- and long-term liquidity ratios. Additionally, the reform sets stricter requirements for credit risk management, obliging banks to assess risks more cautiously and increase their capital reserves to protect against potential losses.
The "final" version of Basel III, which will be implemented in Switzerland starting January 1, 2025, raises the minimum capital adequacy ratio to 10.5% (compared to 8% under Basel II). This increase aims to enhance the financial robustness of banks and better prepare them for economic crises. In addition to the capital ratio, the reform includes stricter rules on internal risk management models, requiring banks to consider various scenarios and cover a broader range of risks associated with mortgage lending.
In Switzerland, the implementation of Basel III is led by the State Secretariat for International Financial Matters (SFI) in partnership with the Swiss Financial Market Supervisory Authority (FINMA). FINMA has issued several ordinances to align Swiss banks' practices with the new Basel III requirements, including measures such as revising capital ratios, strengthening capital levels, and improving financial transparency.
The revision of the Capital Adequacy Ordinance (CAO), adopted by the Federal Council in November 2023, requires Swiss banks to reinforce their capacity to absorb financial losses related to their lending activities, particularly mortgage loans. The new rules obligate banks to hold more capital for each loan granted, increasing their resilience to risks associated with market volatility. These measures also promote greater transparency and comparability of banks' published capital ratios, giving investors and clients a clearer view of financial health.
The introduction of Basel III will significantly impact the real estate sector and the mortgage market in Switzerland. The key changes expected are as follows:
Banks will need to hold more capital to cover mortgage loans with a high loan-to-value (LTV) ratio. This requirement encourages them to take a more prudent approach to lending, applying stricter creditworthiness criteria and thoroughly evaluating the risks associated with each loan. Additionally, banks will need to adjust their internal risk management models to meet the new regulatory standards, which may lead them to limit exceptions to credit policies and restrict access to mortgage loans.
Current and future homeowners will be directly affected by these new regulations. The criteria for obtaining a mortgage loan will become more stringent, requiring a larger down payment and a more thorough evaluation of the borrower's financial situation. Banks may also increase mortgage interest rates to offset the additional costs of holding more capital. This could make real estate loans more expensive, particularly for borrowers with an LTV ratio exceeding 60%.
With the new capital requirements, refinancing options may become more restricted. Banks may be less inclined to offer favorable terms for refinancing or renegotiating loans, thereby limiting the flexibility available to borrowers. Attractive interest rates and flexible repayment options could be scaled back, potentially increasing the overall cost of real estate financing.
The Swiss Bankers Association (SBA) has also revised its self-regulation policies on mortgage financing to comply with the new Basel III rules. The two main directives concern the minimum requirements for mortgage financing and the rules for assessing and managing loans secured by real estate.
The stricter rules introduced in 2019 for income-generating properties have been repealed. Now, the same provisions will apply to all property types in terms of capital requirements and amortization. Mortgage loans will need to meet a minimum equity requirement of 10% and be amortized to two-thirds of the loan-to-value ratio within 15 years. This change reflects the anticipated increase in risk weightings for residential investment property financing under Basel III, thereby making lending more expensive for banks.
Three new measures have been introduced to enhance the management of loans and risks. These guidelines now include public utility developers, specify the requirement for independent assessments, and impose a periodic review of borrowers' creditworthiness. These steps aim to ensure better risk management in the mortgage sector.
To prepare for the implementation of Basel III, homeowners and investors should consider the following actions:
Check if your financial situation allows you to reduce the LTV ratio by increasing your equity contribution. A ratio below 60% generally offers more favorable loan terms and reduces financing costs.
If you have a variable-rate mortgage, consider switching to a fixed-rate mortgage before 2025 to protect yourself from potential interest rate fluctuations and avoid additional costs associated with market instability.
Prepare a solid financing application, including all possible sources of equity (e.g., pension funds, savings plans), to increase your chances of securing a mortgage under the best possible conditions.
Given the complexity of the new Basel III requirements, consulting a mortgage financing expert is strongly recommended to evaluate the best options and anticipate the potential impacts on your financial situation.
The implementation of Basel III in Switzerland from 2025 marks a turning point for the banking and real estate sectors. By imposing stricter requirements on capital reserves and risk management, the reform will directly affect mortgage loans and access to credit for homeowners and investors. By preparing now, optimizing their credit files, and seeking advice from professionals, property owners and investors can successfully navigate this new financial environment and seize the opportunities it presents.
