28.11.2023
People who amortize their mortgage save on interest costs and have less debt. People who extend the financing can use the money in a different way. It depends primarily on your wishes. We’ve listed the most important reasons for and against repaying your financing.
When your financing term comes to an end, you can either extend it or amortize it. Or you can pay back part of the mortgage and extend it for the remaining amount. If you extend it, it’s worth looking into all the different offers. If you want to repay all or part of your financing, this is known as direct amortization. What are the pros and cons? We can explain.
Basically, the higher your mortgage interest rate, the more you can save if you repay the financing. The reverse also applies: if you have a low interest rate for your financing, amortization is not very worthwhile. For example, if you’re paying 2 percent interest on a mortgage of 200,000 francs, you would save 4,000 francs per year, but you have to commit a larger sum from your own savings to your home.
Instead of repaying your mortgage, you can invest the money in shares, funds or securities. Investing in shares can generate higher returns than you pay for your mortgage interest. But beware: financial investments come with risks, and your mortgage interest rate could also rise. Then it can become expensive next time you extend your financing.
| Mortgage interest rates | Returns | repayment |
|---|---|---|
| Mortgage interest rates low |
Returns low |
repayment preferably no |
| Mortgage interest rates low |
Returns high |
repayment no |
| Mortgage interest rates high |
Returns high |
repayment preferably yes |
| Mortgage interest rates high |
Returns low |
repayment yes |
If you extend your mortgage, you can continue to enter these debts in your tax return. Your interest costs then lower your taxable income. If you pay low mortgage interest rates, this results in only a low tax saving. If you’re paying 2 percent interest on a mortgage of 200,000 francs, you could deduct 4,000 francs per year from your taxable income. Depending on the marginal tax rate, this is a saving of a few hundred francs.
After retirement, your income falls by up to 40 percent. In this case, it can be helpful to have a little money put aside. If you’ve invested all your savings into owning your home, you might be short of money for unforeseen expenses. People who haven’t amortized a 10-year, fixed-rate mortgage of over 200,000 francs with an interest rate of 2 percent pay 4,000 francs annually but would have 20,000 francs freely available to them throughout the duration of the mortgage.
If you have your assets in an account where they’re not making any returns, they could well be used for amortization. That way, you’ll save on interest. For example, if you pay back financing of 200,000 francs at 2 percent interest, you’ll save 4,000 francs per year in interest costs.
If you amortize your external financing in full, your home belongs to you. This isn’t just a nice feeling, it also reduces the risk of being in too much debt. Because the value of your property can change. In the best case, it increases. But if the property value decreases, this increases the percentage share of the mortgage in terms of the total value. You level of debt increases. The higher the share of home ownership, the lesser the impact of any loss in value. In the case of full amortization of your property, you can also transfer it debt-free to your children or simply sell it.
To repay your mortgage, you need enough free capital. If you can afford it, repayment improves your loan-to-value ratio, which is the share of financing in your property value. A low loan-to-value ratio means better creditworthiness, in case you want to increase your mortgage again at some point. But you should always keep something in reserve so you’re able to pay for any unforeseen expenses.
Amortization of your own home to 65 percent is regulated by law (second mortgage). If the property has a loan-to-value ratio of less than 65 percent, repayment is usually voluntary. At retirement age, your lender can set a loan-to-value ratio of under 65 percent based on possible increased affordability. With a fixed-rate mortgage, you can usually amortize the financing only at the end of the fixed-rate period. If you want to repay part of the financing earlier, this usually involves a prepayment penalty.
There’s a lot to be said for indirect amortization. This means that you don’t repay the money directly to the lender, you pay it into a retirement savings account 3a, which offers many tax benefits. But there are further factors that come into play in amortization planning and that you should consider in the overall picture. Additionally, payment into pillar 3a is limited.
You are legally obliged to reduce your loan-to-value to two thirds of the property value within 15 years or at the latest by the time you retire. This share of the financing is usually repaid as a second mortgage.
In principle, amortization is worthwhile if the mortgage interest is higher than the wealth tax you have to pay.
It depends on your financial situation and future plans. The more you amortize, the more money is tied into the property and can no longer be used for other plans.
