Direct amortization of mortgages

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Owning your own four walls is a major financial project and it’s unusual for the costs of such a project to be borne alone. Most people, unless lucky enough to have inherited large sums of money or in a position to have saved for many years, will need to take out a mortgage. When you take out a mortgage for home ownership, banks and insurance companies generally finance up to 80 percent of the property value while you have to pay the rest with own funds. Approximately two-thirds of the value of the property is granted as the first mortgage without obligation for amortization. The excess amount must be repaid through indirect or direct amortization.

The difference between the first mortgage and the entire mortgage loan is also referred to as the second mortgage. In the past, this second mortgage had to be repaid within 20 years, but nowadays it’s within 15 years or at the point of retirement.

Learn more: What does amortization mean?

Direct amortization

Direct amortization - reduce debt regularly

In the case of direct amortization, the mortgage is repaid in regular installments to the lender so you continually reduce the amount of your debt, although there is one disadvantage which is obvious at first glance - the sinking debt increases the tax burden. Therefore, based on tax considerations, the majority of borrowers would prefer to amortize their mortgage indirectly. But direct amortization also has an advantage:

If you are planning to make the last few years before retirement a bit quieter by reducing your working hours and consequently earning less in return, direct amortization can be an advantage. Over the years, you have already worked hard to reduce the debt and have to worry less.

Indirect amortization: a more attractive alternative

The alternative is indirect amortization, which is more attractive for many than direct amortization. The indirect variant is not repaid in regular installments. Instead, the mortgage holder pledges the account of the pillar 3a. When the mortgage needs to be paid, the money saved is taken out of the account to amortize the mortgage.

In contrast to financing via direct amortization, the mortgage debt remains the same. This involves certain tax advantages. Due to the higher mortgage debt and the payments to the pillar 3a, you can save taxes, as you can claim both in the tax declaration. Many mortgage holders opt for this variant, as the advantages prevail and usually there are still some pension funds left in pillar 3a, even after amortization of the mortgage. However, direct amortization can also be useful, especially if you can afford the regular payments and are also able to invest in private pension planning.

The MoneyPark amortization calculator can give you a first overview of how you can amortize most effectively. For more help on the subject of mortgages, utilizing the independent advice from MoneyPark is highly recommended. Our goal is to help you obtain the best mortgage conditions in Switzerland, to set up a financial plan and to advise you about amortization to your total satisfaction.

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