If we could answer this question in a single sentence, life as a homeowner would be so much easier. But it’s not an obvious decision: if you pay back your mortgage, you pay less interest. But if you leave your mortgage debt as it is, you can save on taxes.
So which is more worthwhile? Found out what strategy makes most sense for you personally with the help of these four questions:
- Interest: How much will my mortgage cost me?
- Tax: How much can my mortgage debt save me?
- Profit: What returns can I earn elsewhere with my money?
- Retirement: What will I still be able to afford in old age?
Interest: How much will my mortgage cost me?
When you take out a mortgage, the bank will check that you can afford it. Housing costs (interest payments, maintenance, utility bills) should account for no more than a third of your net income. A long-term average interest rate of 5% will be used for calculation purposes.
There are also clear rules regarding the amount of mortgage debt you can take on: you can borrow up to 80% of the value of the property. The remaining amount must come from your own savings. This includes your own savings, money from Pillar 3a or your pension fund. A maximum of 65% of this debt can be covered by a first mortgage. The rest is usually borrowed as a second mortgage, which you have to pay back within 15 years or by the time you retire. All other repayments are voluntary.
Do the following calculation: Assume the interest rate on your mortgage is 2%. If you pay back CHF 100,000, you will pay CHF 2,000 less interest a year. If the interest rate is just half as high, you will only save CHF 1,000 in interest each year. In other words, the higher the interest rate, the more amortisation makes sense.
Tax: How much can my mortgage debt save me?
Ever heard people say “High mortgages can save you a lot of tax”? That’s not always true. On the contrary: not repaying your mortgage in order to pay less tax often isn’t worthwhile.
One example: If you voluntarily pay back CHF 50,000 of your first mortgage, you will pay CHF 1,000 less interest each year (at an interest rate of 2%). As you can no longer deduct this amount from your taxable income, your tax bill will rise by several hundred francs. But you will definitely be better off than if you were to continue paying the extra CHF 1,000 in interest.
Profit: What returns can I earn elsewhere with my money?
You’ve saved a few thousand francs and are wondering how you can get the maximum profit from this money? By reducing your mortgage debt and paying less interest? Or by investing the money elsewhere and hoping for a good return?
The answer is simple: if you pay 2% interest on your mortgage debt, your investment would have to earn a return of more than 2% for it to make sense. However, the marginal tax rate reduces the required return. The marginal tax rate indicates how much tax must be paid on every additional franc of income.
«That’s why anyone who won’t need their savings in the next few years but wants to avoid risky investments would be better advised to repay their mortgage loan,» says expert Christian Breutel.
Retirement: What will I still be able to afford in old age?
When you retire, your income falls by an average of 30% to 40%, as you only receive a pension from Pillar 1 (AHV) and possibly Pillar 2 (pension fund), instead of your usual salary. It therefore makes sense to reduce your mortgage debt as much as possible prior to this, to ensure that you can still afford to pay it in later life.
In addition to the redemption of any second mortgage, part of any first mortgage often has to be paid off in order to retain the one third of net household income principle. Provided you do this early enough, you can secure funding. It is therefore important to obtain information at an early stage and arrange to speak to an advisor.
Meaningful alternative: indirect amortisation
This type of repayment lets you transfer your money not to the bank, but to a pillar 3a account that generates good returns. In other words, you pledge your money to the bank and it is not used to amortise your mortgage loan until later. You can pay in a maximum of CHF 7,056 each year, and this amount is fully tax deductible.
To repay or not? Can you now answer this question? If you need more support, Generali’s mortgage experts will be happy to help you find the right amortisation strategy for you.
The author
Christian Breutel, Director Real Estate & Mortgages, Fortuna Investment
Fortuna Investment AG ist eine Tochtergesellschaft der Generali (Schweiz) Holding AG