Mortgage amortization: directly or indirectly?

Both of these types of amortization have advantages and disadvantages

A mortgage loan must be repaid to the Swiss bank in the form of either the total sum or partial payments. Both of these types of amortization have advantages and disadvantages.

Home buyers who have taken out a mortgage usually make annual or quarterly payments of a set sum. As a mortgage holder, you have two options of paying off your mortgage: direct or indirect amortization.

Direct amortization                                                                                      

Direct amortization means that the mortgage is repaid in partial amounts at regular intervals. The burden imposed by mortgage debt and mortgage interest is lower with this model, which gives home buyers the subjective feeling of a seemingly lower outstanding debt. Another advantage of direct amortization is the option of real estate as an investment. Objectively, however, you lose opportunities for income and property tax deductions, since there is no deductible mortgage debt and interest on debt with this model.

Indirect amortization

In Switzerland, you have the option of indirect amortization when financing owner-occupied properties. With this model, you repay your mortgage in a single lump sum rather than gradually. Instead of repaying the mortgage bit by bit in regular intervals – as with direct amortization –, you invest a contractually determined amount in an insurance or investment, such as a 3a account or securities account, or a 3a or 3b insurance policy. The accrued capital is pledged as additional collateral by the Swiss bank.

With indirect amortization, you increase your provisionary capital while your mortgage debt and mortgage interest burden remain the same. While you are exposed to possible price fluctuations in private investments (pillar 3a), you benefit from a more attractive interest rate than that of regular savings products. As another advantage, both the deposits and the mortgage interest can be deducted from your income tax. In addition, revenue from pillar 3a assets is tax-exempt. You can repay your mortgage with the money from your provisionary fund at any time. This additional security leads many Swiss banks to offer favorable interest rates on mortgages.

In addition to tax advantages, indirect amortization also offers the advantage of insurance. An amortization policy offers you and your family comprehensive insurance protection in the event of death or occupational disability as a result of illness or invalidity.

Conclusion

Usually the first and second mortgage – which most often has higher interest rates – account for 66% and 14% of the property’s value, respectively. You have no choice when it comes to the second mortgage: You must repay it in equal payments within 15 years, before retirement at the latest (direct amortization). However, you can choose whether you want to repay the first mortgage in installments or as a single sum (indirect amortization).

It’s important to calculate carefully and consider all possibilities before deciding. An example: In Switzerland, the mortgage holder often pays no more than 1.4 to 1.6% at an interest rate of 2% when the tax advantage for interest on debt is taken into account. This must be weighed against the expected return generated by the available capital. In other words, repaying the mortgage is more profitable the higher the mortgage interest rate after taxes is when compared with the net return of your own assets.

Which type of amortization is ideal for you depends entirely on your personal financial situation and the current interest rate development. If your resources are limited and insufficient for private retirement provisions, indirect amortization is an option for you. It’s a good choice if the return on investment is higher than the mortgage interest rates with the tax advantages taken into account. However, the experience of recent years has shown that investments of this kind are rare. Another argument for indirect repayment is a low interest rate environment.