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EXPLAINED: Why not paying off your mortgage in Switzerland can save you money

The idea is strange to most of us, but the majority of people in Switzerland choose not to pay off their mortgage - and save money in the process.

Several houses in the Swiss countryside. Photo by Eliabe Costa on Unsplash
Several houses in the Swiss countryside. Photo by Eliabe Costa on Unsplash

Many of us who have been raised with the goal of one day owning property will have one thing on our mind as soon as that deal is done: pay it back. 

From avoiding credit rating issues to not seeing the erosion of our hard-earned money due to interest, there are a number of reasons we want to get out of mortgage debt as fast as possible. 

But in Switzerland, due to a variety of factors, it sometimes makes more financial sense not to pay off your mortgage – or at least to pay off less than you can afford to. 

Estimates vary, but statistics show that a majority of Swiss do not pay their mortgage off before retirement. 

Not only that, but Switzerland has the highest mortgage debt per capita of any country anywhere in the world, according to OECD figures. 

READ MORE: Buying property versus renting in Switzerland: What is actually cheaper?

Here’s what you need to know. 

Why would you not want to pay your mortgage off in Switzerland? 

There are a number of factors which contribute to Switzerland’s unique framework when it comes to mortgages. 

These include the country’s wealth tax, the dual system of mortgages and traditionally low interest rates. 

At this stage, it is important to mention that while a majority of people don’t pay off their mortgage during their working life, this does not mean they skip out and run for the Caymans upon retirement (although presumably some do). 

Instead, it means people are not actively paying off their principal, but investing the funds in an account with their bank. 

When they retire, they use the money in the account to pay off their mortgage debt – and keep the change. 

This sounds complicated because it is – and is explained at length below. 

For more information on buying property in Switzerland, check out this link. 

The Swiss mortgage system: Dual obligations

The reason you may not want to pay your mortgage off in full in Switzerland is partially because of the unusual structure of mortgage obligations. 

The Swiss mortgage system differs from that in most countries in that you effectively take out two mortgages when you buy a property, or more accurately, the mortgage is split into two mortgage obligations. 

The first obligation resembles a traditional mortgage seen abroad, in that it has an indefinite repayment period and covers the majority of the purchase price. 

This will usually be around 60 percent of the total purchase price, less the deposit and the amount included in the second mortgage obligation. 

The second will cover approximately 15 percent of the purchase price. 

Importantly, this will have a fixed repayment period, usually around 15 years (at around one percent per year) or by the time you retire (if shorter than 15 years). 

EXPLAINED: How to save on your mortgage in Switzerland

While you must pay off this amount, the ‘optional’ part relates to the other component of the mortgage. 

Mortgage rates in Switzerland are low by international standards. Photo by PhotoMIX Company from Pexels

Should you choose direct or indirect amortisation? 

Amortisation is an accounting term which refers to reducing the book value of a loan or debt, but basically means paying off your mortgage. 

In most countries, the only option is ‘direct amortisation’, which means paying money to the bank to cover your debt. 

Direct amortisation not only reduces the debt, but the interest (as the interest is based on the quantum of the debt). 

Indirect amortisation is something relatively peculiar to Switzerland and is where the idea of not paying off your mortgage comes in. 

Finding a flat in Switzerland: How to stand out from the crowd

Swiss financial advice site Beobachter points out that the system in Switzerland is effectively set up to allow long-term non-repayment of mortgages. 

“In hardly any other country are the amortisation standards as lax as in Switzerland… In no other national economy can debts remain “forever” in this way”, they explain.

Instead of paying off the mortgage directly, you make regular payments into a ‘third pillar’, which is basically an investment account or fund offered by the same bank. 

This money is then used as a security against the property. 

Keep in mind the amount you need to repay will be the value of the property when you bought it, not the value of the property when you retire. 

During this time you will continue to pay interest on the debt.

This interest will not decrease as you are not paying off the principal, although Switzerland’s low interest rates make this an attractive option. 

Eventually, the debt will be taken from the third pillar. Usually, this will happen when you retire, but you can also sell the property, organise some form of reverse mortgage or sell it to your kids and have them rent it to you, among other options. 

Why is this beneficial?

The main reason this is advantageous is for tax purposes.

In Switzerland, you can deduct mortgage payments from your tax. Also, the money you pay into a third pillar is not taxable. 

Another major reason is the country’s wealth tax, which is not as unique but still relatively uncommon. 

Property: Why you can be taxed four times over for owning a home in Switzerland

In most countries, you pay tax primarily on your income. In Switzerland, you are liable to be taxed on your total wealth as well (under one percent per year). 

The wealth tax is calculated by your total assets minus your total debts. If you have significant debts – including a mortgage – then this will reduce your wealth tax. 

Importantly, the money in your third pillar does not count towards your wealth tax. 

Look, I just clicked on this article to find out about my mortgage, can you speak English please? 

While this all sounds incredibly complicated and you are advised to seek the support of a licensed agent, the calculus is relatively simple. 

Calculate the amount you would pay if you invested the money in a third pillar – keeping in mind the tax savings – by the end of the mortgage, minus the interest payments and the mortgage principal upon retirement. 

Compare this to the amount it would cost you to pay off the mortgage completely, including interest payments, keeping in mind that your tax savings will decrease over time as your regular payments decrease as you pay more of the mortgage off. 

Generally speaking, your financial advisor will present this to you as comparable percentages over time, which means your income will be a major factor in your final decision, as will your retirement plans and the tax rate in the canton and municipality you live in. 

EXPLAINED: How where you live in Switzerland impacts how much income tax you pay

It is important to note that your bank is likely to offer a combined form of both direct and indirect amortisation, which will allow you to spread the risk/burden somewhat. 

Editor’s note: Please keep in mind this report is intended as a guide only and should not replace legal and financial advice from a qualified agent or advisor. 

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COST OF LIVING

Seven products that are becoming more expensive in Switzerland

Covid and the war in Ukraine, coupled with rising inflation, made Switzerland even more expensive than it already was before. These are some of the goods you can expect to pay more for.

Seven products that are becoming more expensive in Switzerland

The good news — if we can call it that — is that inflation rate in Switzerland, which stood at 2.6 percent in April, is significantly lower than in neighbouring France (5.4 percent) and Germany (7.8 percent), as well as throughout much of Europe.

However, Swiss consumers are already feeling the increase in prices of many common purchases.

News platform Watson has listed seven goods and services that now cost more, basing its analysis on the national index of consumer prices (LIK), which measures the inflation of consumer goods in Switzerland.

Among the products that are now more expensive are:

Raw materials

Energy prices, including petrol, oil and gas, have increased in recent weeks. “We are currently paying around 77 percent more for heating oil compared to January 2019”, according to Watson.

A litre of petrol currently costs 2.05 francs, versus 1.60 francs in August 2021.

“A recovery is currently not in sight”, Watson added.

READ MORE: How Covid, Ukraine and energy costs are changing Swiss spending habits

Wood

Wood prices started to go up already during the Covid pandemic in 2020, rising by staggering  500 percent from May 2020 to May 2021.

One of the reasons is that wood pellets can also be used for heating.

“The war has not only made the raw material more expensive, but also the production of the pellets”, according to Andreas Keel, Managing Director of Holzenergie Schweiz, who added that in October a tonne of pellets cost 280 francs, and in January it rose to 360 francs.

What certainly doesn’t help matters is that Russia is one of the world’s largest wood exporters and the sanctions currently in place against this country are exacerbating this shortage.

READ MORE: Switzerland extends sanctions on Russian assets

Furniture

If you are looking for a new sofa, table or another piece of furniture, now is not a good time to purchase them, as their cost has risen by around 15 percent. One reason, as stated above, is the higher price of wood, but there are other contributing factors as well.

“The Swedish furnishing giant Ikea increased its prices by an average of 9 percent at the end of 2021. With a market share of 11 percent, Ikea is one of the big players in Switzerland”, Watson said.

Food

While food amounts to only 6.3 percent of an average household budget, it is probably the most important, as nobody can live without it.

The main reason for the increase is that Ukraine exports foodstuffs such as grain, which affects not only prices of products like baked goods and pasta, but also the cost of animal feed — the latter being essential for the production meat and dairy.

Clothing

Clothing prices typically increase in April / May, but this year they rose more than usual.

The war and Covid-related delivery issues are main factors, but the worst is yet to come, according to Andreas Bartmann, vice-president of  the industry association of textile retailers.

“In the fall, [price hikes] will hit us massively,” he said.

READ MORE: How to protect your savings against inflation in Switzerland

Transportation

“Anyone who wants to buy a new car currently has to pay around 10 percent more than in January 2019”, Watson said.

And this increase is likely to continue, mainly due to higher costs of  raw materials and general delivery problems.

Opting for the used-car market is not a solution either, Watson noted, as “the prices there rose even more significantly than for new cars due to the excess demand”.

You could opt for a new motorcycle or bike, but there too prices are expected to climb — also due to shortage of raw materials and delivery bottlenecks.

Travel

Now that Covid restrictions have been lifted in most countries, foreign travel may remain inaccessible for many people anyway,  because it became more expensive.

One major reason is that, with fuel now costing more, airlines are increasing the price of tickets.

By the same token, the price of petrol could make driving to your holiday destination costlier as well.

Your best bet may be to just stay home. It will feel like 2020 all over again, but without the masks.

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