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Anyone who takes out a mortgage should not only focus on the mortgage interest rates. It is also important for a mortgage strategy to deal from the beginning with the issue of how and whether you want to repay the mortgage. There are several possible options for the repayment or amortization of mortgages.
At MoneyPark, we offer independent and comprehensive advice in our branches, working with you to create a mortgage strategy, and also answering general questions such as "What does amortization mean?"
The difference between first and second mortgages
Property buyers have the option to take out a mortgage of up to 80 percent of the property value. 20 percent of the property's value must be financed with their own capital. The loan of about 65 percent or just two-thirds of the value of the real estate must not necessarily be repaid as a first mortgage, whereas everything above this share falls into the second mortgage and must be repaid within 15 years (formerly 20) at the latest. The mortgagee decides whether or not to repay the entire mortgage on the basis of his or her financial and personal situation. For the amortization, at least of the second mortgage, there are two options: direct amortization and indirect amortization.
- Direct amortization
In the case of direct amortization, the mortgage is repaid in regular tranches. This reduces the mortgage amount and interest rates fall as the burden of taxes increases.
- Indirect amortization
When it comes to indirect amortization, regular amounts are not paid to the mortgage fund, but to a private old-age pension account of Pillar 3a. The mortgage amount is then paid off in one fell swoop. The interest and the associated costs remain the same during the entire term, but this type of amortization is often considered very worthwhile because of the double tax advantages - mortgage debt and payments into the pillar 3a.
Should you repay your mortgage or not?
It may be worthwhile to pay off its mortgage in one fell swoop - provided one has the financial resources. In principle, repayment is worthwhile if the mortgage interest after tax is higher than the yield on assets after tax. Simplified examples could include the following:
Example 1: If you take out an expensive mortgage and invest your money securely but with little return, you could benefit from a repayment plan, which usually results from direct or indirect amortization. However, the entire assets should never be used. This would make little sense for pensioners with a low income and high expenditure. In this case, the mortgage holders would make a better deal if they continue to pay interest but still have their capital at their disposal.
Example 2: Those who receive an advantageous mortgage and have a capital with high yields, for example, by speculative transactions in shares, should not pay off their mortgages. People in this situation would benefit from making regular interest payments. The only prerequisite is the acceptance that the value of the investments may fluctuate.
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Whether you want to take out a mortgage or are already a mortgage holder and want to explore new avenues, MoneyPark offers independent and professional on-site consultancy services throughout Switzerland, with all the expertise needed to help you establish your mortgage strategy.
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