Amortization of your mortgage in Switzerland

What is amortization?

Amortization means repaying a debt. In the context of a mortgage, it means paying off the loan in installments or all at once.

Is mortgage amortization necessary?

In Switzerland, you don’t need to fully pay off your mortgage. For the purpose of amortization, a mortgage loan in Switzerland is split into two parts: 

1. First Mortgage: The so-called '1st mortgage' covers two-thirds of the property’s value. Redeeming this part of the loan is optional. 
2. Second Mortgage: The '2nd mortgage' covers the portion exceeding two-thirds of the property’s value and must be fully repaid within 15 years. If you’re close to retirement when taking out the mortgage, the second mortgage usually needs to be repaid by the time you retire. 

You can choose to amortize your mortgage either directly or indirectly. Please find below a breakdown of the differences as well as the pros and cons of each option.

Direct amortization

With direct amortization, you pay down your mortgage debt with regular installments. Each payment reduces both the principal and the interest you owe. However, as your debt and interest decrease, so do your tax deductions, which means you’ll end up paying more in taxes. 

Indirect amortization

With indirect amortization, instead of paying down the mortgage directly, you make payments into a 3rd pillar pension plan (either an account or insurance policy). At the end of the term or when you retire, the accumulated savings are used to pay off the mortgage.

The main benefit of indirect amortization is that your mortgage debt remains unchanged, allowing you to maximize your interest deductions. Additionally, contributions to the 3rd pillar are tax-deductible, and the capital gains within the account are tax-free. This very often makes indirect amortization the more cost-effective option.

Comparing direct and indirect amortization

Direct amortization

Indirect amortization: