Financing new construction in Switzerland: construction loan and mortgage

Building your own house or buying a new-build off-plan involves a specific financing process. The construction loan, staged disbursements, and conversion to a definitive mortgage are mechanisms that must be well understood to manage your project smoothly.

Specifics of construction financing

Unlike buying an existing property where the mortgage is paid in one lump sum to the seller, construction financing is progressive:

• The land can be purchased and financed separately
• Construction funds are released as construction progresses
• Financing goes through a temporary construction loan
• At the end of the build, the loan is consolidated into a definitive mortgage

The construction loan

How it works

The construction loan is a credit line whose total amount corresponds to the planned financing (total project cost minus equity). The bank disburses funds in stages, according to a schedule linked to construction progress.

Generally, the stages follow the key milestones of construction:

Interest rate

The construction loan generally carries a variable rate (often based on SARON + margin). Interest accrues only on amounts actually drawn, which limits costs during the construction phase.

The rate is typically 0.5% to 1.5% higher than a standard fixed mortgage rate, but as the amounts drawn increase progressively, the total interest cost remains reasonable.

Duration

The construction loan duration is generally 12 to 24 months, corresponding to the planned construction timeline. If the build is delayed, an extension is possible but may incur additional costs.

The step-by-step process

1. Project assessment

The bank evaluates the total project cost, which includes:

• Land price
• Construction cost (general contractor quote or detailed trade-by-trade quotes)
• Architect fees (generally 10% to 15% of construction cost)
• Connection charges (water, electricity, sewage)
• External landscaping
• Contingency reserve (5% to 10% recommended)

2. Credit approval

The bank approves the construction loan based on the complete project. The required equity (20%) is calculated on the total project cost, not just the land.

3. Staged disbursements

At each key stage, the architect or project manager certifies the progress of works. The bank disburses the corresponding tranche after verification. This mechanism protects both the bank and the owner against overcharging risks.

4. Consolidation

At the end of construction, the loan is converted (consolidated) into a definitive mortgage. This is when you set the definitive conditions: fixed rate or SARON, duration, tranches.

Worked example

Construction project for a villa at CHF 1,200,000 (land CHF 400,000 + construction CHF 800,000):

Differences from buying an existing property

Risks specific to construction

Budget overruns

Budget overruns are common in construction projects. Plan a reserve of 5% to 10% of the construction cost. The most common causes: mid-project changes, unforeseen ground conditions, material price increases.

Construction delays

A delay extends the construction loan and increases interest costs. Additionally, if you are paying rent in parallel, costs double during this period. Include delay penalties in the contractor agreement.

Contractor insolvency

The insolvency of the general contractor during construction is a feared scenario. To protect yourself:

• Require a bank or insurance guarantee from the contractor
• Verify the contractor's financial health before signing
• Favour established and well-referenced companies
• Only pay for work actually completed (no excessive advance payments)

Off-plan purchases (buying from a developer)

Buying off-plan from a developer is an intermediate case: you are purchasing a property that does not yet exist, but the financing is often simpler than for individual construction.

• The developer manages the construction loan
• You sign a forward purchase agreement with a payment schedule
• Your equity is paid according to the schedule (often 10% at reservation, 10% at signing, balance at delivery)
• The definitive mortgage is set up at property delivery

Important: verify the guarantees offered by the developer in case of non-delivery or insolvency. A bank guarantee of completion is strongly recommended.