The debt instrument in Switzerland – clarity for your property investment

A debt instrument is a central element of property financing in Switzerland. Anyone buying a property or securing a mortgage will inevitably encounter this term.

In this guide, we explain the term "debt instrument" and its significance in the context of property liens and mortgages. We will also show how the debt instrument provides financial security for both borrowers and lenders and how it contributes to the transparent management of property loans. Read on to learn everything important about debt instruments – from the basics to how they work, as well as their pros and cons.

What is a debt instrument?

A debt instrument is a statutory property lien in Switzerland used to secure property loans. Through the debt instrument, a personal money claim is created, secured by a property lien (the mortgaged property).

This means: The debtor is liable with the property and their entire wealth for repaying the debt.

In simple terms, a debt instrument grants the lender the right to foreclose on the property (e.g. force a house sale) if the borrower fails to repay the mortgage debt as agreed. This makes the debt instrument the backbone of the Swiss mortgage system, even though the common term "mortgage" does not appear in the law. Legally, it is a combination of a claim and a property lien.

Named debt instrument vs. bearer debt instrument – what’s the difference?

When structuring a debt instrument, there are two traditional types. A bearer debt instrument is a paper-based debt instrument that is issued to the holder – in other words, a security legally owned by the person physically holding it. In contrast, a named debt instrument is issued in the name of a specific person (the creditor) and is entered in the land register.

A named debt instrument is transferable, but it requires a written assignment (endorsement), whereas a bearer debt instrument can change creditors simply by handing it over, just like cash.

Both types secure the property lien in favour of the lender. Since a 2012 law revision, there is also the electronic debt instrument as a modern form: no paper document is created, but the lien is registered electronically in the land register – always in the name of the creditor or owner.

For practical purposes, it is important to understand that mortgages and debt instruments are closely linked: without a debt instrument, there is no mortgage secured by property. The debt instrument is therefore the legal tool that gives a bank the necessary security to grant large property loans.

How does a debt instrument work in property financing?

Used as security

In property financing, the debt instrument serves as security for the lender. Here’s a practical example: Mr Müller wants to buy a house in Zurich. The purchase price is 1 million CHF, and he needs a mortgage of 800,000 CHF. The bank will only release this sum if it receives a property lien over the house in return. To this end, a debt instrument for 800,000 CHF is created on the property and pledged to the bank. This debt instrument grants the bank the right to have the property forcibly sold if Mr Müller does not meet his obligations. As long as Mr Müller pays the interest and amortisation as agreed, the debt instrument remains a passive security in the background. The debt instrument claim runs parallel to the actual loan claim and secures it.

Creation and registration

The creation of a debt instrument involves collaboration between the owner, the bank, the notary, and the land registry office. First, the borrower and lender enter into a lien agreement that outlines the terms of the property lien. This is notarised and submitted to the land registry office as an application for registration. After review, the land registry office registers the debt instrument in the land register and issues a lien title if it is a paper debt instrument. For paper debt instruments, the bank typically receives the original document for safekeeping, as legal certainty only exists with possession of the lien title. Even before the final land registry entry, the land registry office usually issues a provisional certificate confirming the upcoming registration of the debt instrument. This interim document is generally sufficient for the bank to release the mortgage, so the property purchase is not delayed.

Practical handling

During the term of the mortgage, the debt instrument remains as a lien with the bank (or registered in their name if it is an electronic debt instrument). The owner feels little impact in everyday life – they retain ownership of the property, can use or rent it, but cannot freely dispose of the encumbered property’s value without the lender's consent.

It’s important to note: even after a loan is fully repaid, the debt instrument does not automatically expire. The debt instrument claim remains at the nominal amount. The owner can request the return of the lien title or the transfer of the electronic debt instrument in their name from the bank. In this case, the bank's debt instrument becomes a so-called owner’s debt instrument. The advantage: the owner can later reuse this existing debt instrument as security if they wish to take out another mortgage. This saves the cost of creating a new debt instrument. Alternatively, the debt instrument can be fully deleted upon request (removal from the land register and destruction of the lien title).

Advantages and disadvantages of a debt instrument

Advantages

• Legal certainty: A debt instrument is clearly regulated by law and officially registered in the land register. This provides both lenders and borrowers with high legal certainty regarding ownership and lien rights. In case of dispute, it is clear who has what claims.

• Improved creditworthiness: By securing a property with a debt instrument, a property owner is seen as more creditworthy by banks. Larger loan amounts are only made possible through a debt instrument, as the bank has a valuable security. For borrowers, this means access to mortgages with comparatively low interest rates, as the bank’s default risk is reduced.

• Transparency: All property liens in Switzerland – including debt instruments – are visible in the public land register. This ensures full transparency about the encumbrances on a property. Potential buyers or other creditors can view the registered debt instruments, making it easier to assess the financial situation of a property. Furthermore, the formalised process (notary, land register) ensures clear documentation.

Disadvantages

• Creation costs: Creating a debt instrument involves costs. Notary fees and land registry fees are usually based on the debt instrument amount and can be a significant expense depending on the canton and amount. When buying a property with a mortgage, these costs are incurred in addition to the purchase price. Although fees can be saved by reusing existing debt instruments, the initial creation is expensive.

• Administrative effort: A paper debt instrument must be securely stored – often the bank does this. If the lien title is lost, a lengthy court process is required to declare the debt instrument invalid. The transfer or modification of debt instruments also requires formalities through a notary and the land register. This administrative effort is partly avoided with the electronic debt instrument, but even then, changes are only possible with land registry entry.

• Restricted liquidity of the property value: If a property is burdened with high debt instruments, this reduces the owner’s freely available assets. Additional loans on the same property (e.g. a second mortgage) are only possible if the value exceeds the existing debt instruments. Even when selling a property, existing debt instruments must either be taken over by the buyer or deleted beforehand, which can affect the sales process. In short, part of the property value remains tied up as long as a debt instrument encumbers it.

Steps to secure a debt instrument

If you want to set up a debt instrument, for example as part of property financing, the following steps are essentially involved:

1. Clarify financing needs: Determine the required mortgage amount and check if an old debt instrument already exists on the property that can be reused. If so, it can be used as security with the bank’s approval and possibly increased in amount, saving costs.

2. Choose a bank and apply: Find a suitable bank or lender for your mortgage and submit the financing application. The bank will assess creditworthiness and the property’s collateral value. If financing is approved, the bank will request the creation of the debt instrument and often initiate the process.

3. Notarial certification: In collaboration with the bank, owner, and a notary, a lien agreement is prepared that specifies the details of the property lien (debt instrument amount, interest rates, rank, etc.). You, as the owner, sign this agreement with the notary, who certifies it publicly. This step creates the legal basis for the debt instrument.

4. Registration in the land register: After certification, the notary or owner submits the registration of the debt instrument to the relevant land registry office. The land registry office reviews the application and makes the entry. In the case of a paper debt instrument, the lien title (certificate) is also created and signed by the land registry official.

5. Transfer to the bank and disbursement: Once the land registry office confirms the entry, the bank either receives the paper debt instrument or a land register entry in its name. Even before the final entry, the land registry office usually issues an interim confirmation so the bank has security. Based on this, the bank releases the loan – meaning the mortgage is paid out and you can finance the purchase or construction project.

6. Aftercare and safekeeping: The debt instrument is now set up and serves as ongoing security. As the borrower, you should monitor the encumbrance in the land register. For paper debt instruments, the creditor (the bank) typically keeps the document. After the mortgage is fully repaid, you decide whether to delete the debt instrument or keep it as an owner’s debt instrument. Deletion requires a land registry application and – for paper form – the physical presentation of the lien title with the bank’s deletion consent. Plan enough time for these formalities, especially if a property sale is pending, to avoid missing any deadlines.

Individual advice – the next step

A debt instrument is a complex but essential tool for solid property financing. Do you have questions about how to optimise debt instruments or need advice on your mortgage?

Thanks to the partnership with Resolve, Alpian clients benefit from exclusive advantages when optimising their mortgages. If you are planning to buy a property – whether as a residence or an investment – this partnership could be especially interesting for you.

Contact Alpian’s expert team to learn more about these benefits and your options.