Amortization also provides tax advantages
With this method a fixed amount is paid back annually, decreasing the size of your mortgage year by year and reducing your interest payments.
Example of direct amortization
The Egger family has secured a mortgage of CHF 520,000 for their new home. The amortization amounts to CHF 5,200 per year. After 20 years the Eggers have reduced the debt on their home by CHF 104,000, leaving them with a mortgage of CHF 416,000.
With this method your mortgage remains unchanged. Instead of paying it back directly you invest your annual amortization payment in a "Pillar 3a", such as the UBS Fisca account. "Pillar 3a" savings receive preferential tax treatment because their purpose is to provide for retirement or the purchase of a primary residence. The amortization payments added to your Fisca account must be used by the time you retire, at the latest, to reduce your mortgage.
Example of indirect amortization
The Egger family pays CHF 5,200 annually into their UBS Fisca account. Mr. Egger will retire in 20 years. At that time the amortization payments deposited in the account amount to CHF 122,000, plus accumulated interest* and less the taxes on capital payouts. This amount is then used to repay the mortgage, reducing it to a total of CHF 398,000.
*calculated at a 2% annual rate
Indirect amortization offers retirement savings and tax benefits
By regularly depositing your amortization payments into Pillar 3a restricted retirement account (for example UBS Fisca) you profit from an attractive, tax-free return and build up your retirement savings. At the same time, these payments can be deducted from your taxable income. In addition your mortgage interest payments remain high, which also benefits you because they are fully tax deductible. Deducting your mortgage interest payments is especially interesting if you are subject to steeply progressive taxation.
The end result is that property owners can save on taxes through indirect amortization.
Savings comparison between direct and indirect amortization
Indirect amortization decreases the mortgage more in the end. The interest earned on the retirement assets allows more capital to be built up, which can be used to repay the mortgage. Higher mortgage interest payments must be allowed for over the course of the indirect amortization, but this is compensated for by their being tax deductible.
Advantages and disadvantages at a glance
Mortgage and interest are continually reduced
Additional tax advantages
Interest on "Pillar 3" capital
No additional tax advantages
Mortgage and interest burden remain at the same high level
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