Should you pay off your Mortgage directly or indirectly?
Impartial advice is important
The question of whether a should be amortized directly or indirectly is one of the most important decisions when it comes to Both options have advantages and disadvantages—and have different effects on taxes, liquidity, and wealth accumulation.
Advice on this topic is often subject to conflicts of interest.
Mortgage
A Mortgage is a loan for the purchase or construction of real estate in Switzerland, with the property serving as collateral. Mortgages can be arranged directly with a mortgage provider or through mortgage platforms. HYPOTHEKE.ch is the largest online mortgage platform. The main types of mortgages in Switzerland are as follows: Fixed-rate mortgage,SARON mortgage
Real Estate Financing
Real estate financing refers to the financing of a property using equity and debt capital. In Switzerland, financing is usually provided through a Mortgage, which is supplemented by own funds. To find the best Mortgage with the most favorable interest rates, homeowners should compare current mortgage rates and obtain multiple offers.
Explanation
Direct or Indirect Amortization
There are two basic ways to repay a Mortgage.
Direct Amortization
- Your Mortgage balance is reduced over time
- Your interest costs drop immediately
Indirect Amortization
- The mortgage remains in place
- Instead, you save capital (e.g., in the which will later be used for repayment.
Pillar 3a is a tied private pension plan in Switzerland and offers tax advantages. In connection with mortgages, it can be used for indirect amortization, Collateral, or home ownership promotion (WEF). Depending on your individual circumstances, Pillar 3a can help optimize your personal mortgage rating.
The difference, then, lies in whether the debt is reduced immediately or only in the future. With , the accumulated capital is pledged in favor of the mortgage lender
With indirect amortization, the Mortgage debt is not repaid directly; instead, the money is paid into a tied pension plan, such as a Pillar 3a account. The Mortgage thus remains in place, while at the same time pension capital is built up and tax benefits can often be optimized. Learn more here: Indirect Mortgage Amortization
Simple and transparent
Direct amortization
With , you pay off your Mortgage in installments—either regularly or with one-time payments.
Benefits
- Lower interest costs
- Less debt = lower risk
- Simple and transparent
Disadvantages
- Fewer tax deductions
- Capital is tied up in the property
- Less flexibility
With most , the amount of the amortization payments must be determined at the time the contract is signed. With certain mortgage lenders, you may be able to decide each year whether or not you want to make principal payments. In most cases, such “amortization models” have defined maximum amounts, such as 20,000 francs per year.
With direct amortization, the mortgage balance is continuously reduced through regular payments. As a result, both the mortgage balance and interest costs decrease gradually over the years. Learn more here: Direct Amortization vs. Indirect Amortization
A mortgage lender provides the borrower with capital and receives interest in return. In the case of mortgages in Switzerland, mortgage lenders are usually banks, insurance companies or Pension funds, which secure the financing through a contract and a mortgage.
Visualization
Mortgage reduction over the years
Target Audience
When Does Direct Amortization Make Sense?
Direct amortization is particularly beneficial for people who prioritize security and want to consciously reduce their debt. It also makes sense if there are no attractive investment opportunities available. It is ideal if you can still make additional contributions to a Pillar 3a account.
Important
If you opt for direct amortization, be sure to maintain sufficient liquidity for unforeseen events. If you can choose the amount of the amortization freely (none or only a small amount it’s better to set it a bit lower. When the Mortgage matures, you can then make a one-time payment to repay a slightly larger portion of the Mortgage if needed.
Mandatory amortization refers to the contractually required repayment of a portion of the Mortgage. In Switzerland, the so-called second Mortgage on owner-occupied residential property must generally be reduced to approximately two-thirds of the property’s value within 15 years or by the time of retirement. Mandatory amortization can be achieved either directly by repaying the Mortgage or indirectly through Pillar 3a. It serves to reduce the long-term risk for mortgage lenders and property owners.
Tax Optimization
Indirect Amortization
With indirect amortization, your mortgage remains unchanged. Instead, you make contributions to a retirement savings account (usually a Pillar 3a account), which is pledged as collateral in favor of the bank.
Benefits
- Tax savings through contributions to Pillar 3a
- Higher mortgage interest remains tax-deductible (through 2028)
- Greater flexibility in building wealth
Disadvantages
- Mortgage rates remain consistently high
- Interest costs remain the same
- Capital is tied up
Visualization
Saving with returns for Amortization
Lukrativ
When is indirect amortization worthwhile?
Indirect amortization is particularly interesting when:
- You can benefit significantly from higher debt for tax purposes
- You want to build long-term wealth
- From a financial perspective, you would no longer be able to make additional contributions to Pillar 3a beyond the Amortization payments
In practice, direct amortization is often the better solution overall. However, because indirect amortization is more lucrative for many financial institutions and “so-called” independent advisors, it is still frequently recommended.
Pros and Cons
What You Need to Know
Direct Amortization
Indirect Amortization
Caution
Indirectly linked to Life insurance
Indirect amortization via a is often recommended. It is not uncommon for significantly better mortgage interest rates to be offered, provided that the Mortgage is amortized indirectly through a life insurance policy.
Despite better interest rates, this is often not the best option because:
- High life insurance costs are incurred
- There is little flexibility
- often yield only low returns
In practice, low-cost Pillar 3a solutions (securities or accounts) offered by a bank are usually the better choice. Don’t be fooled by interest rate reductions.
Common Mistakes When Taking Out a Mortgage
Fixed-rate mortgage with no repayment penalty—the best of both worlds.
Don’t Underestimate It
Liquidity Planning for Retirement
Many homeowners aim to secure the lowest possible Mortgage as quickly as possible. They pay off the Mortgage using their entire savings. At first glance, this seems like a safe strategy, because debt is commonly viewed as something “negative.” However, it’s important to keep an eye on liquidity as well.
A common mistake is to pay down too much of the Mortgage and keep too little in liquid assets. The money is then tied up in the property, and it is often difficult to increase the Mortgage amount later on.
This can become a critical issue, especially in old age. Read more here: Paying Off a Mortgage and Retirement
Mortgages and Retirement
Frequently Asked Questions
Answers on direct and indirect Amortization
With direct amortization, the mortgage is repaid on an ongoing basis.
With indirect amortization, the mortgage remains in place, and the money is paid, for example, into a Column 3a account and pledged in favor of the mortgage lender.
In many cases, no. The reasons for this are high costs, limited flexibility, and often a lower return.
In many cases, a standard Column 3a (account or securities solution) is the better option. If necessary, risk can also be covered through a standalone .
Term life insurance protects the financial situation of a family or a homeowner in the event of circumstances such as death or disability. Unlike a traditional endowment life insurance policy, no savings balance is built up. The insurance company pays out an agreed-upon benefit only when the insured event occurs. Endowment life insurance policies are often expensive and opaque, whereas term life insurance policies are transparent and cost-effective. Many mortgage brokers earn a lot of money by recommending indirect Amortization to their clients while simultaneously “selling” a mixed life insurance policy.
You agree to make regular contributions to your Pillar 3a account. The balance is pledged in favor of the bank and will later be used to repay the Mortgage.
It is possible to switch, but it often involves a lot of effort, depending on the Mortgage lender, and usually incurs costs during the term of the contract. Therefore, the decision should be carefully considered.
The so-called second mortgage—the portion exceeding approximately 65% of the Loan-to-value ratio—must be paid off within 15 years or by the time of retirement for owner-occupied properties (mandatory amortization).
Amortization can occur either directly or indirectly. In the case of indirect amortization: Certain mortgage lenders re-appraise the property at the end of the Mortgage term. If the property’s value has risen significantly, the funds saved through indirect amortization may not have to be used to repay the Mortgage, depending on the overall situation.
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