To pay off mortgages or not?

Is it worth it to pay off your mortgage or not? We'll explain when it pays off and the different options available.

To afford a home at all, at least 20 percent of the property's value must be financed with your own capital – that is, with your own savings or by drawing down pension fund assets.

For example, if you want to afford a property worth one million Swiss francs, you would have to pay 200,000 Swiss francs out of your own pocket. A mortgage is then taken out with a bank for the remaining amount.

However, before you take out a mortgage, you should not only focus on the mortgage interest rate. Instead, address from the outset the question of whether and how you want to pay off the mortgage. There are several options: direct amortization and indirect amortization.

With direct amortization, the mortgage debt is paid off in regular installments, with the mortgage amount and interest decreasing while the burden of taxes increases.

If you opt for indirect amortization, you pay regular amounts into a private Pillar 3a retirement savings account instead of directly to the mortgage lender. This is how you eventually pay back the mortgage amount in one go. Throughout the term of the mortgage, the interest rate and the associated costs remain the same. However, the double tax advantage (mortgage debt as well as the payments into pillar 3a) often makes this form of amortization worthwhile.

Mortgage amortize or not? If the after-tax mortgage interest rate is higher than the after-tax return on assets, then it's worth paying off the mortgage.

You should ask yourself the following crucial question: What happens to the money if you do NOT use it to pay off your mortgages?

So if you don't want losses in the short term, you should use the "lying around" capital to pay down the mortgage.

However, you should keep in mind that once your mortgage has been paid off, it may not be possible to increase it again without problems. Perhaps the bank is no longer willing to do so, or the Internal Revenue Service will not accept another step-up and so the mortgage interest can no longer be fully deducted for tax purposes. The money used for amortization is tied up in the property and is therefore not available for future consumption.

Whether and in what amount a redemption is worthwhile depends on various factors and can ultimately also only be determined individually.

Looking for a strong partner to finance your real estate purchase? If so, we have just the thing for you with Mortgage Exchange Inc.