Is owning your own home your idea of a self-determined life? If you are looking into financing, i.e. a mortgage, you will come across the term “amortisation” sooner or later. What exactly does amortisation mean, and what do you need to know about it? Swiss Life answers the most important questions.
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What does amortisation 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 amounts, known as amortisation instalments. If we delve deeper into this definition, we come across two types of mortgage amortisation: direct and indirect. Both options have their advantages and disadvantages, which we will cover later in this article.
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 66.67% or two thirds of the value of the property, does not have to be repaid if affordability criteria are met.
However, if you need a second mortgage because you need more than 66.67% or two thirds of the value to finance your property, by law this must be repaid within 15 years. Many lenders also require it to have been paid off by retirement age at the latest. Here, you can choose between direct and indirect amortisation.
What does "direct amortisation" mean?
If you opt for direct amortisation, your mortgage will be repaid to the lender in regular instalments.
Advantage
By continuously reducing your mortgage debt through direct repayments, you also reduce the interest owed.
Disadvantage
Your tax burden increases as you are able to deduct less and less interest from your taxable income.
What does indirect amortisation mean?
If you opt for indirect amortisation, your instalments will not be transferred to the lender. Instead, you will pay the instalments into a pillar 3a or 3b pension account. These funds can then be used for the one-off amortisation of the second mortgage when the contract expires. Pledging pillar 3a or 3b assets provides the lender with security for the second mortgage, and thus the certainty that it can be repaid when the contract expires.
Advantages
The mortgage remains at the same level throughout the term. You therefore benefit from having the same tax-deductible amount throughout the term, provided there is no change in interest rates. If interest rates rise, you will be able to deduct more. The money you pay into pillar 3a can also be deducted from your taxable income. You are free to choose the type of investment for the pillar 3a account.
Important: observe the lender’s guidelines. You can also protect the amortisation against misfortune. When buying your own home, it becomes more important to protect yourself against unforeseen events such as death or disability. Indirect amortisation with an insurance solution can minimise this risk.
Disadvantage
Your mortgage debt, and thus your interest burden, always remain at the same level, as long as there is no change in interest rates. Depending on the pillar 3a investment, price fluctuations may also occur.
Our advice
Indirect amortisation with a pillar 3a or 3b pension solution can be particularly attractive for families. Should the policyholder die, the mortgage will be covered by the sum insured. It is important for families 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. You should carefully consider 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.
Let us guide you to your own home. And beyond.
Do you dream of living a self-determined life in your own home? To make this dream come true, there are some things you need to know in advance. Find out more about saving, financing, financial viability and mortgages.
