Is your own home your idea of a self-determined life? If you are dealing with a mortgage, you will come across the term "amortisation" sooner or later. But what exactly does amortisation mean and what do you need to know about it? Swiss Life answers the most important questions.
What does repayment of a mortgage mean?
In a nutshell: in the mortgage sector, amortisation describes the repayment of the mortgage loan. A mortgage is amortised if it is repaid either in its entirety or in regular instalments, known as tranches. If we delve deeper into this definition, we come across two types of mortgage repayment: direct and indirect repayment. Both options have certain advantages and disadvantages, which we would like to explain to you in the further course of this text.
Does my mortgage need to be repaid in full?
Actually, you don't necessarily have to repay your mortgage in full. A distinction is made between voluntary repayment (1st mortgage) and compulsory repayment (2nd mortgage). Your first mortgage, i.e. a loan-to-value of around 65 percent or about two thirds of the value of the property, does not have to be repaid if it is affordable.
However, if you need a second mortgage because a higher level of financing than 65 percent or two thirds of the property’s value is required for your own home, this must be repaid within 15 years or by the time you retire. Here you can choose between direct or indirect amortisation.
"The repayment concept should take account of the mortgagor's emotional considerations as well as financial optimisations. It is therefore important that the amortisation type – direct and indirect amortisation – is in line with the mortgage concept and that your tax and return opportunities are fully exploited. It is also important to be able to guarantee repayment in every situation in life – even in the event of a possible stroke of fate."
Fabio Egger, Swiss Life Sales Manager
What does "direct amortisation" mean?
If you opt for direct repayment, your mortgage will be repaid to the bank in regular tranches.
- The advantage of direct amortisation: by continuously reducing your mortgage debt through direct repayments you also reduce your interest burden.
- The disadvantage of direct amortisation: your tax burden increases because the interest costs on your mortgage are deductible from your taxable income.
What does indirect amortisation mean?
If you opt for indirect amortisation, your payments will not be transferred to the mortgagee. Instead, you pay instalments into a pillar 3a pension account. You then use the proceeds when you close your pillar 3a account to amortise your mortgage debt. By pledging pillar 3a assets, the money is not paid out directly, but remains in your account or custody account. This will count as equity and improve your affordability. At the same time it serves as collateral for the lender.
- Advantages of indirect amortisation: the mortgage remains at the same level throughout the term. You therefore profit from having the same tax-deductible amount throughout, provided interest rates don't change. If interest rates rise, you have greater scope for deductions. The amount you pay into pillar 3a can also be deducted from your taxable income. You are free to design the 3a account as regards the type of investment. Please note: observe the lender's guidelines.
Another advantage is that you can protect the amortisation against strokes of fate. Protection against death and disability is more important than before buying your own home. This risk can be weighted appropriately with indirect amortisation.
- The disadvantage of indirect amortisation: if you opt for indirect amortisation, you need to know that your mortgage debt and your interest burden always remain the same. Depending on the investment in pillar 3a, price fluctuations may also occur.
Our advice: indirect amortisation with a pillar 3a pension solution can be particularly attractive for families. If the policyholder dies, the mortgage is covered by the sum insured. It is important for a family to review their pension situation carefully and to choose the right pension solution for the right indirect amortisation. Including benefits coverage is an option too.
Should I repay my mortgage in full?
There is no catch-all answer to this question as it depends on your individual situation. Consider carefully which option is right for you and your financial situation. Our experts will be happy to help you determine which method is more tax-efficient and how you can effectively save more.
Would you like expert advice on mortgages?
Would you like to talk to an expert from Swiss Life or Swiss Life Select to find out which mortgage is best for you? Make an appointment today for a personal consultation – at your home or by video.
Let us help you buy your own home. Let's go.
Do you dream of a self-determined life in your own home? To make this dream come true, there are some things you need to know first. Find out more now about saving, financing, affordability and mortgages.