Definition of residual value in the context of your mortgage in Switzerland
In real estate, residual value is the estimated value of a property at the end of an analysis period. In a development project, it may also refer to the amount remaining for the land after deducting costs and the developer’s profit.
What does “residual value” mean in real estate?
In a financial valuation of an income-producing property, the residual value, also known as the terminal value, is calculated at the end of the projection period from the expected sustainable net income. It is then discounted to determine its value as at the valuation date.
In a property development, the term may have a different meaning. The residual land value is then the estimated value of the completed project less construction costs, ancillary costs, financing costs and the developer’s required profit margin.
How does residual value affect your mortgage?
For a property purchase in Switzerland, the bank does not generally base the amount of the mortgage on this future value. It relies primarily on the mortgage lending value, determined in particular from the purchase price and the property value estimated by the lender (bank, insurance company or pension fund).
Residual value is mainly used in the valuation of income-producing properties, construction projects and development land. It depends heavily on the assumptions used, particularly future income, the capitalisation rate, maintenance costs and the building’s expected condition.
