With direct amortization, you make regular monthly payments directly to the bank to repay your mortgage. As a result, your mortgage debt gradually decreases, and your interest burden is reduced accordingly. However, as your outstanding debt declines, the amount of mortgage interest you can deduct from your taxes also decreases.
Indirect amortization works differently: instead of repaying the bank, you pay the agreed repayment amount into your private pension plan (pillar 3a). Your mortgage balance and the corresponding interest payments remain unchanged throughout the term. In this case, you benefit from higher tax deductions, as you can deduct both the mortgage interest and the pillar 3a contributions from your taxable income.
Regardless of which option you choose, it is important to carefully determine the amount of amortization. A rate that is too low will unnecessarily extend the repayment period and increase total interest costs, while a rate that is too high can restrict your financial flexibility.
As a general rule, an initial amortization of at least 1% of the mortgage amount is recommended. For a property valued at CHF 800,000, this would mean CHF 8,000 per year or approximately CHF 667 per month. Depending on your budget and prevailing interest rates, a higher repayment rate of 2–3% may also be advisable to pay off your property more quickly.
Make use of a mortgage calculator to simulate different scenarios. This will help you find the optimal repayment rate that allows for efficient repayment without jeopardizing the affordability. Additionally, be sure to take potential changes such as family planning or retirement into account when planning your repayments.
Anyone financing a home should also consider the tax implications. In general, the higher your mortgage debt, the more interest you can deduct on your tax return. This may initially speak in favor of a lower repayment rate.
However, as your outstanding debt decreases, so does the taxable value of your assets. In addition, funds saved in pillar 3a are tax-exempt until they are withdrawn, at which point you pay a reduced tax rate. Therefore, a high level of indirect amortization can be advantageous from a tax perspective, even as deductible mortgage interest decreases.
Ultimately, your personal situation is decisive. Carefully weigh the advantages and disadvantages of higher versus lower repayment rates. Consider your long-term home financing strategy and adjust your repayment plan as needed. This approach will help you find the optimal path to turning your dream of homeownership into a reality.
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