With direct amortisation, you repay the debt, i.e. the second mortgage, in regular instalments. As a result, the debt amount decreases regularly and the interest payable also decreases. The part to be amortised is covered by a variable-rate mortgage with possibly fluctuating interest rates, as repayments are not possible during the term of a fixed-rate mortgage.
This is a good solution for some people, as it gives them peace of mind when the debt is continually decreasing. However, this also means that the interest on the debt falls steadily, the amount that can be deducted from taxable income decreases and the tax burden increases each year.
The alternative is indirect amortisation: the part to be amortised is paid into a pillar 3a account or custody account. The annual payments to the third pillar are pledged to the creditor bank, but are not amortised directly as a debt. The debt remains the same until repayment (usually at the time of retirement), as does the interest on the debt, and at the time of repayment the second mortgage is repaid with the Pillar 3a payment.
This has tax advantages:
Both the mortgage interest and the contributions to pillar 3a can be deducted from taxable income, so that you benefit twice in tax terms.
The Pillar 3a capital and the income from the pension capital are tax-free and the capital is taxed at a favourable special rate on withdrawal. The mortgage debt, on the other hand, is deducted from taxable assets, which means that potential wealth taxes also remain low or are cancelled during this period.
If you wish to amortise larger amounts, this is possible indirectly by making a purchase into the pension fund if there is purchase potential there. This purchase sum is then withdrawn as capital at the time of retirement and used for repayment.
Indirect amortisation is only possible for owner-occupied residential property. The annual deposits are subject to the respective maximum deposit for pillar 3a, since the beginning of this year this has been CHF 7,056 for employees with a pension fund connection and CHF 35,280 for self-employed persons without a pension fund (maximum 20% of net income).
Below you can see a comparison of direct and indirect amortisation with the following assumptions:
Mortgage to be amortised CHF 100,000, taxable income CHF 135,000, married, marginal tax rate 34.8%, interest on mortgage 1.5%, interest on 3rd pillar 0.5%, repayment in 15 years.
The total advantage of CHF 28,149 of indirect amortisation compared to direct amortisation takes into account the higher interest on debt and capital payment taxes.
The tax savings of CHF 42,630 with indirect amortisation are made up of
- Tax savings from interest on debt CHF 7,830
- Tax savings from pillar 3a contributions of CHF 34,800
On the other hand, there is a tax saving of CHF 4,176 from debt interest in the case of direct amortisation.
If you have any questions on this topic, please contact
Stephanie Cuche
Lic.rer.pol, financial planner with federal FA
Image source: www.unsplash.com with assembly by Beatrice Baumann-Fahrni