Leverage effect: definition

The leverage effect refers to using debt, in your case a mortgage, to finance a large share of a real estate investment while contributing only a fraction of the price with your own funds. Thanks to leverage, the yield you generate on your own capital can be higher than the property’s “gross” yield.

In other words, leverage allows you to control a high-value real estate asset with a relatively limited down payment, hoping that the combination of rents and capital appreciation will generate an attractive return on your own funds.

With a Swiss mortgage, leverage is particularly visible: you often finance 80% (sometimes more for buy-to-let) with debt and only 20% with your own funds. When the property’s net yield (after running costs, maintenance and taxes) exceeds the cost of your mortgage debt, leverage works in your favor and increases your return on equity. Conversely, if interest rates rise, rents fall, or the property value declines, leverage works the other way and amplifies potential losses.

Leverage effect: understanding how it multiplies results

To understand leverage, it helps to view it as a multiplier:

Without leverage, you invest only your own funds. Your wealth then tracks the asset’s yield closely (for example 3% per year if the property delivers a 3% net yield).
With leverage, you invest only part of your own funds, with the rest financed by the mortgage. If the property’s net yield is higher than the interest rate, the difference benefits your equity directly and increases its profitability.

In practice, leverage relies on three elements:

Debt share (mortgage) vs own funds
The higher the share financed with debt (for example 80–85%), the stronger the leverage: a small movement in the property’s value or rental income has a proportionally large impact on your equity.
Difference between net yield and interest rate
Leverage is positive if the property’s net yield (net rents after costs and maintenance) is higher than the cost of debt (mortgage rate + related fees). In that case, borrowing “works for you”.
- If net yield > cost of debt → positive leverage.
- If net yield < cost of debt → negative leverage.
Risk and sustainability
Too much leverage means that:
- your interest charges are higher;
- your room for maneuver in case of vacancy, unexpected works or higher rates is reduced;
- a correction in real estate prices has a strong impact on your net worth.

The goal, in a prudent real estate financing strategy, is to use leverage to build wealth without putting your financial stability at risk. This means stress-testing less favorable scenarios (higher rates, lower value, rents below expectations) and checking that your cash flow remains sustainable.

A concrete, numbers-based example of leverage

Let’s imagine a buy-to-let building purchased for CHF 1,000,000 in Switzerland.

Purchase price: CHF 1,000,000
Own funds: CHF 200,000 (20%)
Mortgage: CHF 800,000 (80%)

Assume the following:

Annual gross rents: CHF 45,000
Costs (maintenance, insurance, various non-recoverable costs): CHF 10,000 per year
Net income before interest: CHF 35,000 per year
Average mortgage rate: 2.0%

Property yield (without looking at the financing structure)
- Net yield on the property value:
  CHF 35,000 ÷ CHF 1,000,000 = 3.5%
Interest cost on the mortgage
- Annual interest:
  CHF 800,000 × 2.0% = CHF 16,000
Net result after interest
- Annual result after interest:
  CHF 35,000 (net before interest) – CHF 16,000 (interest) = CHF 19,000
Return on equity (leverage)
- Return on your CHF 200,000 of equity:
  CHF 19,000 ÷ CHF 200,000 = 9.5%

Thanks to the leverage effect, a property whose intrinsic net yield is 3.5% generates a 9.5% return on your equity, because you use mortgage debt to finance most of the investment at a cost (2.0%) that is lower than the property’s yield.

Now let’s see what happens if conditions deteriorate slightly:

Gross rents fall to CHF 40,000 (vacancy, pressure on rents)
Costs rise to CHF 11,000 (higher maintenance)

New calculation:

Net income before interest: 40,000 – 11,000 = CHF 29,000
Interest unchanged: CHF 16,000
Result after interest: 29,000 – 16,000 = CHF 13,000
Return on equity: 13,000 ÷ 200,000 = 6.5%

Leverage remains positive, but the return on equity drops sharply. If mortgage rates rise to 3.5% on the CHF 800,000, annual interest would rise to CHF 28,000; with CHF 29,000 of net income before interest, the result after interest would be only CHF 1,000, i.e. a return close to 0.5% on your CHF 200,000 of equity.