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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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OPINION & ANALYSIS

OPINION: Why Switzerland needs to scrap its fabled 1,000 franc notes

If the Americans can get by with $100 bills, the British manage with £50 and EU citizens now mostly €200, why do the Swiss need such a large denomination? The answer is, they don’t, writes Clare O'Dea, as she explains why it should be binned.

OPINION: Why Switzerland needs to scrap its fabled 1,000 franc notes

The existence of the 1,000-franc note, so blatantly open to misuse, is justified with platitudes about the Swiss liking cash.

Apparently the 1,000-franc note is quite pretty but I can’t say for sure as I’ve never seen or touched one. With the exception of Singapore and Brunei, no other country sees fit to issue such a large-denomination note for the simple reason that it’s not needed for legitimate business.

Financial secrecy is obviously a big part of the appeal of the 1,000-franc note. To say otherwise is not really credible. Cash in this condensed form is anonymous, untraceable, easily transportable, easily concealed.

As Bradley Birkenfeld said in a 2015 CNBC interview, “I mean you could put half a million in your pocket, no problem”. Remember that name? Birkenfeld was the (in)famous UBS whistleblower who exposed the bank’s shady practices to the US authorities in 2007, triggering the dismantling of Swiss banking secrecy.

The Swiss National Bank (SNB) explains that the big note is used as a “store of value” to a considerable degree. What does that mean? The SNB’s own research shows that most people keep less than 1,000 francs in cash at home. Are we talking about storing value under the mattress or in a safe deposit box?  Who does that and for what reason?

Look, I’m sure there are people with 1,000 notes squirrelled around the place who run their finances in a totally clean and honest way. The latest SNB survey on payment methods found that half of the population had been in possession of at least one 1,000-franc note over the previous two years. The note is especially popular among men over the age of 55

But inevitably there are tax evaders, money launderers and other criminals who find the big notes come in very handy. The €500 note was scrapped after 17 years mainly because of its popularity with criminal gangs in the EU and beyond, to the extent that it had become an embarrassment.

The €500 note is still legal tender but no new notes have been issued in the euro zone since 2019, following the decision by the European Central Bank. The move came after serious concerns were expressed by academics, international police agencies and EU finance ministers.

When production of the €500 note officially ceased, the largest denomination note accounted for 20 per cent of the value of all euro notes in circulation. Doesn’t it seem odd that 60 per cent of the value of all francs in circulation are in 1,000-franc notes? That’s 9.4 per cent of all physical notes. Something doesn’t add up.

I have heard people argue that 1,000-franc notes are popular for big expenses, like buying a car or jewellery. Or for paying big bills over the counter at the post office (this I have seen). Rumour has it that farmers like to buy livestock with the purple polymer and paper mix. Each to his own.

But these financial practices are fast becoming dated and are anyway not common enough to explain the volume of 1,000 notes in circulation. Yes, it’s official: cash is no longer king in Switzerland.

As recently as 2017, some 70 per cent of non-recurring payments were made in cash, purchases like clothes, the supermarket shopping, or restaurant meals, according to the SNB survey on payment methods. This had reduced to 43 per cent by 2020, the last time the survey was carried out.

The most recent data on payment behaviour comes from the Swiss Payment Monitor, a joint research project between the University of St. Gallen and the ZHAW Zurich University of Applied Sciences, which reported in August of this year.

The study found that the debit card remains the most frequently used form of payment for face-to-face business (34.8 per cent), followed by cash (33.2). Credit cards are less popular at 16.5 per cent. Meanwhile mobile payments are growing in popularity, increasing share from 1.5 per cent of transactions to 11.2 per cent over the past five years. 

What this boils down to is that people are perfectly adept at paying electronically in all kinds of ways and the role of the 1,000-note in retail or person-to-person purchases is far from essential.

While we’re on the subject of money, this month saw the release of the Credit Suisse Global Wealth Report, in which Switzerland emerged as the world’s richest country. The average wealth of adult residents in this country is 672,508 francs, up 5.4 per cent from the previous year. Assets include stocks and shares, pensions savings, and property.

In case you’re feeling left out, the median wealth per adult in Switzerland is 165,266 francs. That means half of the population possesses less than this amount. The figures are skewed upwards by a smallish number of mega rich individuals, with a little help from the 1.1 million millionaires in Switzerland. My guess is that these two groups have the most use for the 1,000-franc notes.

Reading between the lines, I sense some national pride in the attachment to this world-beating high denomination note. Swiss people like to hold cash – that’s our way. We also like our privacy – so what!

Not to spoil the fun, but all cultures need to be aware that just because they’ve always done something a certain way does not mean the practice has merit and is worth preserving. I recommend taking a long, hard look at the legitimacy of the fabled 1,000-franc note.

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