What does mortgage amortization mean when buying a home?

Everything you need to know about repayment: systems and strategies

To understand amortization mortgages , we need to break down the structure of Swiss real estate financing. The bank divides your loan into two tranches, each with different amortization rules .

The obligation: The second mortgage must go.

Banks finance real estate up to 80 percent of its market value.

• 1. Mortgage: This covers up to 65 percent of the property's value. An amortizing mortgage is usually optional here. The bank does not require repayment as long as the property remains affordable.
• Second mortgage: It covers the peak between 65 percent and 80 percent. This is the riskiest part for the bank.

The rules for mortgage amortization clearly state: This part must be fully repaid within 15 years or at the latest by reaching retirement age (65 years).

This means that the mortgage amortization is highest in the first few years after the purchase, as you have to reduce this mandatory portion (the second mortgage) linearly.

Method A: Direct amortization mortgage

With a direct amortization mortgage , you pay the money back directly to the bank.

• The process: You transfer a certain amount, for example, quarterly. Your debt to the bank effectively decreases.
• The advantage: As the debt decreases, so does the interest burden. You pay less interest to the bank.
• The downside: You can deduct mortgage interest from your taxable income. If your debt decreases through direct mortgage amortization , this deduction also decreases. At the same time, your net worth increases. The result: Your tax bill gradually rises.

For many homeowners, direct amortization of a mortgage is therefore unattractive from a tax perspective, even if the feeling of being "debt-free" is psychologically pleasant.

Method B: Indirect amortization of the mortgage

This is the preferred method in Switzerland. With an indirect amortization mortgage , you don't pay anything back to the bank – at least not immediately.

• The process: You pay the amortization amount into a pledged Pillar 3a retirement savings account at the bank. The mortgage debt remains constant on paper.
• The tax advantage: Since the debt doesn't decrease, you can continue to fully deduct the high mortgage interest payments from your taxes. At the same time, you can also deduct the contribution to Pillar 3a (the mortgage amortization amount ) from your income. So you save on taxes twice.
• The solution: At the latest upon retirement, the assets in Pillar 3a are paid out, thereby repaying the mortgage in one go. The mortgage amortization therefore occurs over time.

Furthermore, the savings in pillar 3a accrue interest tax-free. Therefore, indirect amortization via a mortgage is the financially smarter choice for most working people.

Calculation example: The burden of mortgage amortization

How much does your mortgage amortization cost you per month?

Let's say you buy a house for 1,000,000 francs.

• Total mortgage (80%): CHF 800,000.
• 1st mortgage (65%): CHF 650,000.
• 2nd mortgage (15%): CHF 150,000.

You have to pay off the 150,000 francs of the second mortgage in 15 years.

• Calculation: 150,000 CHF ÷ 15 years = 10,000 CHF per year .

This means that, in addition to interest and ancillary costs, the amortizing mortgage will burden your budget with approximately 833 Swiss francs per month. This amount is fixed, regardless of how high or low interest rates are. Those who forget to factor in the amortizing mortgage when planning their budget will be in for some unpleasant surprises.

Voluntary mortgage amortization: Sensible or not?

Should you also voluntarily amortize the first mortgage (under 65%)?

This is where opinions differ.

• Pro voluntary mortgage amortization: If you want to be debt-free in retirement or can't find an investment opportunity that yields a higher return than the mortgage interest costs, repayment is secure. It reduces your fixed costs in retirement.
• Against voluntary mortgage amortization: Money you put into an amortization mortgage is tied up in real estate. You can no longer access it. If you keep the money liquid in a bank account or invest it in securities, you remain more flexible. Furthermore, with every voluntary mortgage amortization, you lose tax advantages (imputed rental value issue).

Many experts advise limiting the mortgage amortization to the mandatory amount (the 2nd mortgage) and investing the remaining money in a diversified manner.

Mortgage amortization for condominium ownership

The same rules apply when buying a condominium. However, banks often require stricter adherence to the amortization mortgage in this case , as the land value is lower than with a single-family home. The amortization mortgage is an important tool here to minimize the bank's risk in the event of falling property prices.

Conclusion

The question "What does mortgage amortization mean?" goes straight to the heart of your financial planning. Mortgage amortization is the obligation to reduce debt, but it also offers you some flexibility.

For most Swiss residents, indirect amortization via a Pillar 3a mortgage is the best strategy. It combines necessary debt reduction with maximum tax savings and retirement planning. Direct amortization is usually only worthwhile if mortgage interest rates are extremely high or if you don't need to optimize your taxes.

It's important to remember: an amortizing mortgage ties up liquidity. Don't sign a contract with excessively high voluntary repayments that restrict your daily life. Think of the amortizing mortgage not as a burden, but as a form of mandatory savings that increases your net worth year after year.

If you want to calculate how much tax you can save with the indirect option, or whether a voluntary amortization mortgage makes sense in your current life situation, Loft provides neutral calculators and comparison tools to optimize your strategy.

Glossary

• Mortgage amortization: The scheduled repayment of the mortgage debt to the bank. Besides the interest, it is the second cost factor in financing.
• Second mortgage: The portion of the loan that exceeds 65% of the property value. This portion must be repaid within 15 years.
• Direct amortization: Repayment is made directly to the bank. The debt decreases, the interest burden decreases, but the tax burden increases.
• Indirect amortization: The mortgage amortization payment is made to a pledged Pillar 3a account. The debt remains the same, which secures tax advantages.
• Imputed rental value: A notional income that homeowners must declare for tax purposes. High mortgage interest rates (due to foregoing direct amortization of the mortgage ) help to offset this for tax purposes.