Written by Yanis KharchafiWhat is a real estate amortisation?
Introduction
In real estate, amortisation simply refers to the the reimbursement of part of the mortgage loan, more precisely the 2nd rank, over a maximal time period of 15 years or, at the latest, before the legal age of retirement.
Be careful: if you want to opt for the pledging of your pillar 2, your 2nd rank might not be equal to 15% but 25% instead which will, in any case, have to be reimbursed on the same terms.
These two types of amortisation are called direct and indirect amortisation.
The line-up:
The two types of amortization in Switzerland
For those who haven’t yet read our articles on real estate financing, here’s a summary of the key points:
When purchasing property, if you don’t contribute at least 35% of the purchase price—in other words, if your debt exceeds 65%—you’ll need to repay the difference between the minimum 20% equity required and the 35% demanded. This repayment, known as amortization, must be made year by year, typically over a 15-year period.
Examples of real estate financing
- Standard case: Providing the minimum 20% equity:
- 30% Equity Contribution: 35% – 30% = 5% to be amortized.
- No Amortization: Equity contribution between 35% and 100% = 0% amortization required.
In Switzerland, lenders (banks, insurance companies, or pension funds) typically offer you a choice between:
- Direct Amortization: You repay the loan directly, gradually reducing the borrowed amount over time.
- Indirect Amortization: Payments are made into a savings solution (such as a 3rd pillar account), which will be used to repay the loan at a later date.
The choice between these two methods depends on your financial situation, tax optimization goals, and preferences for wealth management.
What is direct amortisation?
It is when we pay a certain amount each month in order to directly reimburse part of the mortgage loan.
Since the total amount of the loan decreases, interests decrease as well, year after year. Because everything we pay as mortgage loan is deductible, we will gradually lose this advantage. What is more, a high debt implies a lower taxable income. The more you reimburse the loan, the more your fortune will increase and thereby, so will your taxes
Avantage : interests decrease.
Disadvantage: taxes increase.
What is indirect amortisation?
It is when you pay the same amount throughout the amortisation time period. But instead of directly giving this money to the bank, you keep it safely on a pillar 3A account, either at the bank, or at an insurance, or else, on a 3B account in case the maximal amount for 3A account has been exceeded.
Why would you do this? Simply to make sure your debt remains high in order to continue enjoying a significant tax optimization.
And what happens to this account after 15 years? It is closed, the sum is transferred to your bank and the debt is downgraded to the 1st rank.
Avantage : multilevel tax deduction (reduction in income and wealth taxes, as well as the tax advantage related to the 3A account).
Disadvantage: rates do not decrease during the first 15 years.
You can simulate your purchasing capacity as well as observe the amortisation thanks to our solvency calculator!
There you go! You know everything about the two types of amortisation!
How FBKConseils can assist with your real estate project?
While amortization may not be the cornerstone of your real estate purchase, it remains a significant factor to consider. Over a 15-year period, the choice between direct and indirect amortization could have substantial financial implications.
Introduction meeting
What better way to start than with a complimentary 20-minute meeting? This session will provide answers to all your initial questions.
Advisory sessions
It’s straightforward to work through the numbers together during a consultation and determine mathematically which scenario suits you best. The choice of amortization method can affect the duration of your repayment, your tax situation, and the financial burden of interest payments.
Administrative support
A real estate purchase goes beyond calculations. At FBKConseils, we support you through all administrative steps, from project analysis to the final signature and organizing your move.