Direct vs. Indirect Amortization of Mortgages

Learn how direct and indirect mortgage amortization in Switzerland can affect your financial future.

20
.
09
.
2023
Direct vs. Indirect Amortization of Mortgages
No items found.

In Switzerland, buying a home is a major life step and a long-term investment for many people. Most Swiss citizens need a mortgage to finance the purchase of their dream home. When taking out a mortgage, there are various options available, including direct and indirect amortization. In this blog post, we will explain the differences between these two approaches and find out which one is best suited to your financial situation.

What is a mortgage?

Before we turn to the two types of amortization, let's briefly clarify what a mortgage actually is. A mortgage is a loan granted by a bank or other financial institution to finance the purchase or construction of a property. In return, the borrower agrees to repay the loan plus interest. The way you repay your mortgage can have a significant impact on your financial stability.

Direct amortization: The traditional method

Direct amortization is the traditional method of repaying a mortgage in Switzerland. With this approach, you pay back a fixed amount each month, consisting of part of the interest and part of the principal. Over time, the interest portion decreases while the principal portion increases. This means that you reduce your mortgage over time and eventually become debt-free.

The advantages of direct amortization are:

  1. Clear debt reduction: Since you repay capital regularly, you know exactly how much you still owe and can better plan your financial future.
  2. Interest savings: As the outstanding amount of your mortgage decreases, you pay less interest over time, which can lead to significant savings.
  3. Financial security: Over time, you build up property, which gives you a certain degree of financial security.

Indirect amortization: the alternative option

Indirect amortization, also known as a “pillar 3a mortgage” or “BVG mortgage,” is an alternative method of repaying your mortgage. With this method, you save money in a tied pension plan (pillar 3a) and use it to pay off your mortgage in one lump sum at the end of the term.

The advantages of indirect amortization are:

  1. Tax advantages: Contributions to pillar 3a are tax-deductible, which can reduce your tax burden.
  2. Flexibility: You have the flexibility to pay money into your pension plan when your financial situation allows and pay off the mortgage at the end of the term.
  3. Inheritance planning: In the event of death, the funds from the pillar 3a can be transferred to your heirs, which can play an important role in your long-term financial planning.

The choice between direct and indirect amortization

The choice between direct and indirect amortization depends on various factors, including your financial goals, your current financial situation, and your risk tolerance. Here are some considerations that may help you decide:

No items found.