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An optimal mortgage strategy also includes the right amortization plans, i.e. the repayment of the mortgage credit. It may be repaid either in a lump sum or in equivalent tranches over a longer period. It is, therefore, important to deal with the questions: What amount must be amortized? How will I repay the mortgage? Which type of amortization is best for me?
Amortization is, in principle, the repayment of a mortgage. Mortgage lenders generally require an amortization of the mortgage amount that exceeds 65 percent of the value of the property, while additional amortization is voluntary. If you buy a property or build a house, 80 percent of the property value can be taken as a mortgage, while 20 percent need to come from the borrower's own funds. The mortgage amount exceeding two-thirds of the property value is designated as a second mortgage and must be repaid within 15 (formerly 20) years or at retirement age, at the latest.
To amortize a mortgage or not?
There is no choice for the second mortgage: Anything above 65 percent loan-to-value ratio must be repaid within the agreed period (retirement age at the latest). Whether it is worthwhile amortizing the mortgage or not depends ultimately on two crucial questions:
- How does the amortization affect your tax situation?
- What will happen to the money if it is not used for amortization?
Money that is used for amortization cannot be spent on anything else. It is not worthwhile to amortize if an alternative investment solution results in a higher return than the cost of the mortgage in the long term. This is usually only possible with risk-bearing forms of investment. So if you do not want to have any losses in the short term, you should think about repaying the mortgage with your capital.
The different methods of amortization and their characteristics
For the amortization of a mortgage, there are basically two options, which have advantages and disadvantages depending on your financial situation and your own preferences. They are direct amortization, in which the mortgage loan is repaid in regular tranches, and indirect amortization, where the money is invested to pay off the mortgage in one fell swoop.
In the case of direct amortization, a partial amount of the mortgage is repaid at regular intervals, which reduces the amount of the mortgage and the interest, although the tax burden increases as a result of the declining mortgage debt. Direct amortization has the advantage of being a feel-good option, as the burden of mortgage interest and the amount of debt is gradually reduced, and the property can be used as an investment option with an object yield. The disadvantages are the rising taxes and a possible lack of retirement savings.
In the case of indirect amortization, the mortgage debt remains the same throughout the term, since the tranches are not paid to the mortgage holder, but are deposited in a private pension scheme for pillar 3a. While the mortgage costs remain at the same level, the tax burden is reduced as both the payments to Pillar 3a and the mortgage interest can be claimed for tax purposes. The accumulated capital in the pillar 3a can then be used at a later date to trigger the mortgage. In the case of the second mortgage, the fact that it must be paid after the agreed time is also applicable. This is also possible even before retirement since you have access to the accumulated pension for the financing of the home or the triggering of the mortgage.
Make amortization work for you
Anybody who takes out a mortgage in order to make a project happen, should start with the subject of amortization and use our amortization calculator. "Amortize or not? What is the best type of amortization for me?" Make an appointment for an independent and professional consultation in one of our MoneyPark branches across Switzerland, and we will work with you to create a customized mortgage strategy and help you solve all these questions.
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