“Is it worthwhile to make voluntary or extraordinary amortization on our mortgage?”

Basel, 08.03.2024

“Is it worthwhile to make voluntary or extraordinary amortization on our mortgage?”

After completing the mandatory amortization of the second mortgage, many mortgage holders cease further payments. The reasons for this vary: some may prefer to use the funds for vacations or investments. Often, tax considerations play a role as well, since lower mortgage interest means fewer tax deductions.

A voluntary amortization allows for a portion of your mortgage debt to be repaid, specifically targeting the first mortgage.

There are several methods to reduce your mortgage debt:

• Account balance:
  • In the case of direct amortization, for example, a sum of CHF 50,000 is repaid at point X. The funds are debited from your account and credited towards reducing the debt, immediately lowering the amount owed and consequently, the interest payable.
• Pillar 3a withdrawal:
  • Contrary to direct amortization, this method involves depositing amounts into a pension solution, such as Pillar 3a. After a few years, a withdrawal is made to pay off the debt.
• Pension fund withdrawal:
  • It is also possible to repay part of the mortgage with a withdrawal from the pension fund.

Whether amortization is beneficial depends on several factors:

• Affordability of the amortization:
  • Consider that the repaid money will no longer be available. Ensure you have sufficient reserves for potential renovations or unforeseen expenses.
• Investment opportunities:
  • Could the money be invested to yield a higher return than the cost of the mortgage interest? If so, it might be more sensible to invest the funds. If not, amortization could be a sensible option.
• Tax implications:
  • Depending on your marginal tax rate, repaying the mortgage might not be advantageous as lower interest payments lead to fewer tax deductions, possibly resulting in more taxes being due than the interest saved.

Before making a decision, it’s advisable to carefully consider all these factors and, if necessary, consult an expert to develop the optimal strategy for your situation.

We are available for a free initial consultation.