Direct vs. Indirect Amortization of Mortgages

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

What is a mortgage?

Before we look at the two types of amortization, let us briefly clarify what a mortgage is. A mortgage is a loan provided by a bank or another financial institution to finance the purchase or construction of real estate. In return, the borrower commits to repaying 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 a fixed amount each month, which consists of a portion of the interest and a portion of the capital. Over time, the interest portion decreases while the capital portion increases. This means that you gradually reduce your mortgage and eventually become debt-free.

The benefits of direct amortization are:

1. Clear debt reduction: As you regularly repay capital, you know exactly how much you still owe and can plan your financial future more effectively.‍
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 equity, which provides you with a degree of financial security.

Indirect Amortization: The Alternative Option

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

The benefits 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 deposit money into your pension scheme when your financial situation allows, and pay off the mortgage at the end of the term.‍
3. Estate planning: In the event of death, the funds from Pillar 3a can be transferred to the heirs, which can play an important role in your long-term financial planning.

Choosing 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 can help you make a decision: