Many couples dream of owning their own home. These days, the existence of a marriage certificate is not of great importance for many people. However, couples living in a common-law partnership are well advised to regulate certain things clearly. Legal experts recommend drawing up a cohabitation agreement – especially in the case of joint property ownership.
- The age-old question of money – create clarity
- Regulate the costs and their distribution
- Most mortgages are held jointly
- The law – the three forms of ownership
- What would happen in the event of an accident or death?
- Occupational pension schemes
A common-law partnership is defined as a “marriage-like” arrangement. From an outside perspective, there is hardly any difference to actually being married. Common-law couples often decide to buy a flat or house together, both partners live in the same household for many years, share everyday life and support each other. However, in legal terms – specifically with regard to social insurance and inheritance law – cohabiting couples need to be aware of some important differences. Should they later decide to separate, for example, there are no clear rules – in contrast to married couples who agree to a legally recognised divorce.
We recommend that common-law partners clarify any important issues in a cohabitation agreement,Florian Schubiger, a pension and financing specialist at VermögensPartner in Zurich
“We recommend that common-law partners clarify any important issues in a cohabitation agreement,” says Florian Schubiger, a pension and financing specialist at VermögensPartner in Zurich. The key issues regarding real estate, he adds, need to be regulated contractually:
- Financing arrangements, origin of capital
- Future allocation of home-ownership costs
- Arrangements in the event of subsequent separation
Banks typically finance 80 per cent of property purchase prices via mortgages. Of course, this means that the buyers must cover the shortfall from their own funds. In light of this, it is important to consider that, many years later, it may no longer be possible to prove that one partner contributed more than the other towards the purchase. Therefore, it is essential to document this at the time.
The age-old question of money – create clarity
Often, the partners’ financial means are different, both in terms of their available assets and income. Therefore, before they start mentally furnishing their new home, both partners need to work together to get the financing in place and perform a “cash check” of their available capital (savings, advance withdrawals or gifts, second-pillar advance withdrawals, etc.). Common-law couples should record the origin of their private funds being invested in the property.
Whatever spouses or common-law partners “earn” during their time together is commonly regarded as their “joint” assets. However, this definition is objectively incorrect, or at the very least inaccurate. Under the law that applies to married couples, the chosen matrimonial property regime and the statutory provisions are decisive. But what about unmarried couples? Common-law partners do not have “joint” assets in the legal sense.
Regulate the costs and their distribution
In some cases, the costs of property ownership are rather small; however, larger amounts may be required for subsequent amortisation or value-enhancing investments. Common-law couples are well advised to regulate this transparently – how should the ongoing expenses be financed, for example: interest payments, ancillary costs, maintenance, renovations, etc.? What happens if a major expense is incurred in the future (for example, for the replacement of an old heating system)? Should both partners contribute equally or in proportion to their income?
For most couples it seems almost paradoxical to discuss their future separation. But when it comes to the topic of cohabitation and home ownership, this is a fundamental question. Who will be allowed to stay in the property and continue to live there? Do both partners agree that the home will then be sold and the proceeds split 50/50?
Most mortgages are held jointly
According to Florian Schubiger, the details of the mortgage contract must also be considered: “Basically, if two partners buy a property together and are also both listed in the land register as owners, this is also reflected in the mortgage.” In practically all cases and with all banks, it is customary that both cohabiting partners are jointly and severally liable for the house loan or mortgage. For a common-law couple, “joint and several liability” means that both partners are liable with their income and assets for all obligations arising from their agreement with the bank. In other words, if one partner cannot pay their share of the interest and/or capital repayment, the other partner is automatically liable.
At the time of the purchase, the lending bank will take a more detailed look at the mortgage’s financial sustainability. As previously mentioned, property buyers must typically cover at least 20 per cent of the purchase cost from their own funds. Furthermore, the contracting parties or debtors must be in a position to bear all costs even if interest rates rise (see our mortgage/affordability calculator). In the case of common-law couples who buy a property together, both earned incomes can in principle be taken into account. A spokeswoman for the Glarner Kantonalbank says: “If both partners are joint or co-owners, both are automatically borrowers.” Consequently, the bank will also include both earned incomes in its affordability assessment.
The law – the three forms of ownership
The law provides for three ownership models: sole ownership, co-ownership or joint ownership.
Couples typically opt for the co-ownership model. In this case, each partner can freely dispose of his or her co-ownership share. The partners’ shares are listed separately in the land register, very often with a 50:50 ratio – but any other ratio is also possible (e.g. 75:25). “The ratio depends on how much of their own funds each party contributes to the purchase,” explains Florian Schubiger.
In the case of joint ownership, both common-law partners are entered in the land register as equal owners. The property then belongs to them equally – even if one partner has invested more equity than the other. In the case of joint ownership, the partners are legally bound to each other and can only sell the residential property by mutual consent.
Note on the occupational benefit scheme and/or the withdrawal of pension-fund assets: In the case of joint ownership, it is not possible for a couple without a marriage certificate to use pension assets to finance their property purchase. In this case, they would have to opt for the more common co-ownership option.
What would happen in the event of an accident or death?
Since cohabitation is not regulated in statutory inheritance law, common-law couples should draw up both a cohabitation contract and a will. The will regulates the respective shares of the inheritance, taking into account any compulsory portions for other heirs (e.g. parents, children). Additional arrangements for other beneficiaries can be established via an additional contract of inheritance.
Common-law couples should also consider scenarios involving unforeseen events. What if one partner is unable to work, for example as a result of an accident or disability? Incapacity to work after an accident is well covered under the Swiss Accident Insurance Act (UVG); incapacity to work due to illness occurs statistically more frequently, but in practice is usually less well insured. It is therefore advisable to identify this pension gap and close it, for example, with a disability pension.
Occupational pension schemes
Couples without a marriage certificate should keep an eye on the situation regarding occupational pensions. Florian Schubiger explains: “We recommend that pension-fund members register their common-law partner with the pension fund.” Depending on the pension-fund regulations, the conditions for cohabitation may vary. The surviving partner must meet at least one of several conditions in order to be deemed eligible for financial support in the first place. For example, the cohabitation must have lasted continuously for at least five years, and he or she must have been financially supported to a considerable extent by the deceased partner.
The difficult question of financial security in the event of a serious stroke of fate or the death of a partner falls into the same category. Common-law couples have various options when it comes to protecting themselves against these risks – for example, with a mutual life insurance policy. If one partner dies, the insurer would pay a sufficient premium to substantially reduce the mortgage, for example.
Conclusion: To be on the safe side, common-law partners should carefully plan their finances and pension arrangements. Ultimately, ensuring that a jointly owned house or flat is on a financially sound footing will pay off in the long term.
Under Swiss law, common-law couples are often either not covered by the Swiss accident insurance scheme, the state old-age and survivors’ insurance (AHV) or the pension funds at all, or they can only receive these benefits under very specific conditions. In each case it is therefore best to seek advice to find out which types of additional financial protection make sense.
In many cases, private pillar 3a and 3b pension plans are suitable for common-law couples. These pension solutions are typically flexible in order to include beneficiaries related to the insured party. In this context, a common-law partner must notify the pension fund of their chosen beneficiary (i.e. their cohabiting partner).
Various factors are decisive when it comes to the distribution of property: how much equity will each partner contribute? What proportion of the running costs will each partner cover? And don’t forget about taxes – what are the tax consequences given that mortgage interest can be deducted from income?
A written agreement is not compulsory, however it can prevent conflicts about cost contributions and ownership, for example in the event of separation. Such agreements should be drafted individually, perhaps with the help of a specialist, within an appropriate time frame.
Records of investments in the property, maintenance costs, etc. should be kept, including how much was contributed by each partner. These documents and receipts could prove extremely useful in settling a subsequent dispute over money. If nothing is documented, the quotas entered in the land register (co-ownership shares, etc.) will apply.