Mortgage amortization — What is worthwhile?
What is the amortization of a mortgage? The definition
In a financial context, amortization is the repayment of borrowed capital. Mortgages generally finance up to 80% of the property value through their bank in order to finance the purchase price of a property. These credit funds are divided into a first mortgage with a loan of up to 65% and a second mortgage of 15% of the property value. Because real estate also loses value over time, the mortgage is reduced with regular amortization payments.
Is there an obligation to amortize?
The second mortgage must be paid off within 15 years or up to retirement age. This amortization is mandatory. The first mortgage amounting to 65% of the purchase price, however, does not have to be repaid. Mortgages can be repaid through one-off, monthly, quarterly or annual amounts.
Different forms of amortization
Mortgages have two options for amortizing their mortgages: direct amortization and indirect amortization.
Direct amortization
In the case of direct amortization, the debt is regularly repaid by the bank.
advantages:
- Continuous reduction of mortgage debt
- Falling interest charges over time
- Clear sense of debt relief for the borrower
- Increasing the share of equity in the property
- Improving creditworthiness
drawbacks:
- Lower tax deduction options due to falling debt interest rates
- Less financial flexibility as money flows directly into mortgage repayment
- Higher overall tax burden due to lower deductions
- Not using Pillar 3a tax benefits
Indirect amortization
With indirect amortization, you pay the amortization amount into a Pillar 3a retirement account or into a fixed life insurance policy. The mortgage debt remains unchanged until the saved capital is used for repayment at a later date.
advantages:
- Maximum tax benefits due to consistently high debt interest rates
- Additional tax savings through payments into Pillar 3a
- Higher financial flexibility as capital is not directly tied up
- Opportunity to benefit from returns on a retirement account
- Potential tax benefits when the 3a capital is disbursed at a later date (privileged taxation of capital withdrawals from private pension provision)
drawbacks:
- No reduction in mortgage debt over the term
- Consistently high interest charges
- Risk of fluctuations in the value of pension assets
- More complex structure that requires more understanding and planning
- Possible restrictions on the use of retirement savings
How do you calculate amortization?
Direct amortization
To calculate the annual payments in the event of direct amortization, the amount of the second mortgage is divided by 15 years. In order to obtain the monthly rate, the result is divided again by 12 months.instance: 120,000 CHF/15 years = 8,000 CHF per year/12 months = 666.67 CHF per month.
Indirect amortization
The payments for indirect amortization are calculated in the same way as for direct amortization, but are made into the pillar 3a or 3b retirement account in order to be invested with interest. The mortgage will be repaid with the capital at the latest when you retire. Excess savings can be used for voluntary amortization or other plans.
How should you amortize your mortgage?
The choice between direct and indirect amortization depends on the individual financial situation, personal goals and willingness to take risks. Careful consideration and professional advice are recommended to find the optimal strategy. We would be happy to introduce you to our partner Nicolas Inauen, agency manager of Switzerland's second-largest independent mortgage broker Resolve.
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