Indirect amortization of mortgages

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As a homeowner, you can usually finance your home or apartment with a mortgage of at least 65 percent of the market value of the property and include a second mortgage of up to 15 percent of the property value. However, this second mortgage must be repaid within 15 years or at the point of retirement. In the case of regular repayment, however, the tax burden increases as the decreasing mortgage and interest debt payments will continuously reduce the tax deductions.

Learn more: What does amortization mean?

In the case of indirect amortization, the amount of the mortgage remains the same and the bank does not request repayment in regular tranches. Instead, you open a pillar 3a pension fund account to which you transfer money. Payments to pillar 3a can be deducted from taxable income. On your retirement at the latest, you will receive the capital in pillar 3a and use it to repay the mortgage.

Indirect amortization

The tax benefits of indirect amortization

Instead of repaying the mortgage to the bank at regular intervals, you simply pay the sum into your retirement savings account 3a, which you pledge as collateral. The biggest advantage of this indirect amortization is tax related, as payments into Pillar 3a can be deducted from taxable income. In addition, the pension capital provides savings interest, which is tax-free. As the amount and the interest on the mortgage debt in the indirect amortization remain the same, the debt interest can also be deducted every year in their entirety from the tax. This means that there are double tax benefits. Simplified, it can be said that an indirect amortization via the pillar 3a starts to make sense from a marginal tax rate of around 25 percent.

Indirect amortization with pillar 3b without tax benefits

Indirect amortization also works with pillar 3b (Savings account, etc.). However, tax advantages are then lost as these amounts can not be deducted from the tax.

Indirect amortization with pillar 3a can pay off for your retirement savings

If you deposit amounts that you would otherwise pay in regular installments to the bank into a retirement savings 3a account and pledge this account, you will also enhance your retirement funds. Not only are the above-mentioned tax advantages noticeable, but there is also a good chance that something is left in your pension account after repaying the mortgage. This way, you can use the accumulated capital to pay off the second mortgage, and then there might even be sufficient funds remaining to continue the amortization of the first mortgage or to have a decent retirement balance.

3a pension capital can be used for repayment at any time

It is worth noting that you do not have to wait until you reach the minimum age for the benefits from pillar 3a for a repayment of the mortgage - for men, this is 65 years; for women, it is 64. Instead, you can use those funds to finance an owner-occupied property at any time.

If you are unsure of whether indirect amortization works for you, or if direct amortization is a more sensible option, you can check with our amortization calculator. In any case it is worthwhile to benefit from independent advice from MoneyPark before you proceed. We provide individually tailored conditions for you and aim to find you the best mortgage in Switzerland, to create a mortgage strategy and to assist you in planning your amortization.

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