Usufruct and mortgage financing in Switzerland: definition
Usufruct is a right that allows you to use a property owned by another person and receive the income from it, without being its full owner. In real estate, this means for example that you can live in a home, rent it out and collect the rent, while another holder keeps the bare ownership of the property.
Usufruct and bare ownership: a separation of rights
Usufruct divides ownership into two parts: the usufructuary, who has the economic use of the property, and the bare owner, who retains the patrimonial substance of the property. This distinction matters in a real estate project, because the person who lives in or uses the property is not necessarily the person who can sell it freely.
In practical terms, if you are the usufructuary of a house, you can use it, live in it or rent it out. However, you cannot decide alone to sell the property, make substantial alterations to it or burden it with a new mortgage as if you were the full owner. The bare owner owns the property, but their right is limited as long as the usufruct exists.
Usufruct and mortgage credit
In the context of a real estate loan in Switzerland, usufruct makes the bank’s analysis more complex. The bank does not look only at the value of the property, but also at who holds the real rights, who bears the costs, who can sign the guarantees and who actually controls the economic value of the home.
In principle, the usufructuary bears in particular the maintenance costs, taxes and interest on mortgage debts linked to the property. This allocation can influence the calculation of financial affordability, because mortgage charges are not always borne by the bare owner, even though that person legally owns the property.
For a bank, a property encumbered by usufruct is less straightforward to finance than a property held in full ownership. The usufructuary’s right of use limits the bare owner’s economic freedom: in the event of a sale, refinancing or forced realization, the situation must be analysed precisely. This is one of the reasons why lenders often require the agreement of all parties concerned before accepting a mortgage transaction.
Usufruct, taxation and real estate costs
Usufruct is not only a legal concept: it also has tax effects. In many cases, the usufructuary declares the income linked to the property, for example the rents collected or the imputed rental value if they occupy the home themselves. The bare owner, by contrast, holds a patrimonial value reduced by the existence of the usufruct.
This logic is particularly important in successions and donations. The value of the usufruct can be capitalized, in particular according to the duration of the right or the life expectancy of the usufructuary, in order to split the value between usufruct and bare ownership. The Canton of Vaud specifies, for example, that the capitalized value of the usufruct is taxed in the hands of the usufructuary and deducted from the capital received by the bare owner.
Before accepting a property in usufruct or bare ownership, you should therefore check who pays the mortgage interest, maintenance work, insurance premiums, taxes and any renovations. A poorly drafted written allocation can create a lasting conflict between the usufructuary and the bare owner, especially if the property requires significant work.
Usufruct and real estate transfer
Usufruct is often used to transfer a property while protecting a person who must continue to use it. For example, parents can transfer the bare ownership of a home to their children while retaining the usufruct, which allows them to continue living in the property or receiving the rent from it.
This solution can be useful, but it is not neutral. The property becomes more difficult to sell, mortgage financing can become more complex and important decisions generally require coordination between the usufructuary and the bare owner. Usufruct is therefore a wealth-planning tool, but not a simple administrative formality.
