Optimise your mortgage

Becoming the owner of a property implies a change in your tax situation and opens the way to various methods of optimisation. In the vast majority of cases, the institution granting you a mortgage will ask you to pay off the debt while leaving you free to choose between direct or indirect amortisation. In order to fully understand the advantages and disadvantages of these two methods, it is necessary to first integrate the basic tax aspects, namely:

Elements to improve your taxation:

Mortgage debt -> reduces your taxable assets
Mortgage interest -> reduces your taxable income
Indirect amortisation -> reduces your taxable income (under certain conditions)
Property maintenance costs -> reduce your taxable income

Elements detracting from your taxation:

Tax value of your property -> increases your taxable wealth (with a discount for the first 10 years)
Direct amortisation -> non-deductible
Theoretical rental value of the property -> increases your taxable income

The first method of tax optimisation is to try to maximise the elements that have a positive impact on your taxation while decreasing the elements that tend to increase your tax bill.

DIRECT AMORTISATION

You reduce your debt consistently, usually every quarter, in addition to paying interest.
This reduces your mortgage load over time but increases your tax burden.

As your debt is gradually decreasing, the interest burden will also decrease year after year, with a double negative effect:

1. Gradual increase in your taxable income due to a reduction in the amount of deductible interest
2. Increase in your taxable assets due to progressive debt reduction

The direct amortisation method is therefore not optimal; it allows you to gradually reduce your mortgage burden but increases your tax burden.

INDIRECT AMORTISATION

The idea here is not to reduce your debt in a real way but to build up a separate savings capital, which will be used to reduce your debt when you retire. This savings capital is built up by means of a 3rd pillar, on which you make regular payments and which is given as security to the mortgage institution. In this way, you benefit from a double advantage:

1. The (deductible) amount of your debt and the interest remain constant, thus maximising your tax deductions
2. Since direct amortisation is replaced by a payment on a 3rd pillar, your amortisation becomes deductible from your taxable income

Indirect amortisation can even offer further advantages depending on the form in which it is taken out (3rd pillar life insurance); you can find out more in the 3rd pillar section.

It should be noted that these optimisation methods are aimed at financing a main residence and have a greater or lesser impact depending on your personal situation and place of residence. Other approaches are recommended if the financing is for a rental property or a second home.

Our experts will be happy to study the most appropriate solution for your situation and provide you with the corresponding simulations.

The Swiss private pension system offers two distinct options:

 3rd pillar A (or linked 3rd pillar) open to employees and self-employed persons. Payments are deductible from taxable income up to a maximum limit. This is a form of tied pension provision, which means that the assets are only available under certain conditions.

3rd pillar B (or free 3rd pillar) -> open to all. Payments are not capped, but 3rd pillar B has fewer tax advantages than 3rd pillar A.

Any person in gainful employment may deposit money on a 3rd pillar A opened with a bank or insurance company, up to an annual ceiling. The amount paid is deductible from taxable income. However, a distinction is made between two categories of persons:

1. persons who are already members of a pension fund, usually employees
2. persons who are not members of any pension fund, usually self-employed persons, who are allowed to make higher payments.

The Federal Social Insurance Office sets the maximum authorised payments each year. The deductible amounts for 2021 are: CHF 6,883.00 for workers who are members of a pension fund (employees). And 20% of the annual income, but no more than CHF 34,416.00, for workers who are not affiliated to such a fund (self-employed persons).

The 3rd pillar A capital is not subject to wealth tax, and the income generated by it is exempt from income tax and withholding tax.

FORMS OF 3RD PILLAR A

BANKING
This is an account comparable to a savings account but subject to the 3rd pillar regulations. It allows you to deduct the amount paid into the account each year from your taxable income but does not provide any additional coverage.

Assets may be left in the account and will then be increased by the annual interest payment or may be invested in mutual fund units in order to seek a higher return (the capital is not guaranteed in this case).

This solution is particularly attractive for a single person who is not yet the owner of a property. Indeed, the banking solution’s great flexibility is an asset to build up equity for property acquisition. Lack of protection in the event of death is less problematic than for a person who already owns a property and benefits from a mortgage.

On the other hand, this solution is less attractive for a married person or someone who already owns a property; the lack of coverage in case of death or disability could be a major problem if an unhappiness should occur (no protection for survivors)

LIFE INSURANCE
This is a life insurance contract subject to the 3rd pillar regulations.

 The premium paid each year is deductible from your taxable income.

 Unlike the 3rd banking pillar, life insurance offers additional benefits, namely:

1. Minimum guaranteed capital at maturity
2. Guaranteed capital in the event of the policyholder’s death before maturity
3. Freeing up the payment of premiums in case of incapacity (the premium is paid by the insurance company on your behalf if you become incapacitated after a certain waiting period)
4. Disability pension payment (option for some insurance companies)
5. Compensation for possible gaps in pension provision following the use of your 2nd pillar at the time of the purchase of your property

Like the 3rd banking pillar, it is possible to invest the premium amount in units of investment funds in an attempt to maximise return at maturity. Some insurance companies offer contracts with an investment in mutual funds while retaining a capital guarantee at maturity.

In the case of conventional life insurance, the insurance return is represented by the technical rate and the excess dividend.

The 3rd pillar solution in the form of life insurance is particularly advantageous for a married person and property owner because it allows the family to be covered in case of death or disability.

Important notes on the 3rd pillar A (banking and life insurance ):
An early withdrawal of 3rd pillar A assets is only possible for the purpose of acquiring or building a home for one’s own use, for the purpose of paying off a mortgage on a main residence, in order to become self-employed, in the event of a permanent departure from Switzerland or a change in self-employment. Withdrawals from the 3rd pillar are taxed at a much lower tax rate and separated from the rest of the income. The beneficiary must pay a flat-rate tax depending on the canton, the amount of the withdrawal and the beneficiary’s marital status.

3RD PILLAR B

This is a so-called “free” life insurance policy for which payments are not capped.

It offers fewer tax advantages than the 3rd pillar A (tax possibilities depend on the canton, the marital status of the policyholder and are cumulated with other capped tax deductions). Its advantages are:

1. Deductible from taxable income under certain conditions
2. Supplement in the event that the entire amount of indirect amortisation cannot be achieved via a 3rd pillar A
3. Additional protection in addition to the 3rd pillar A (death, disability)

Do not hesitate to contact our specialists for further information on aspects of pension planning and optimisation methods.

In the context of property acquisition, your 2nd pillar (pension fund or vested benefits account) can be used to make up part of your own funds. The new regulations require that at least 10% of the purchase price must come from a source other than the 2nd pillar (e.g. cash or your 3rd pillar).

 The 2nd pillar can be used in 2 different ways:

WITHDRAWAL OF THE TOTAL OR PARTIAL AMOUNT AS EQUITY
(amount available for home ownership from your pension fund certificate)

Advantages:
– Decrease in the amount of your mortgage and the related charge.

Disadvantages:
– Payment of tax on the levy
– Decrease in your pension at retirement
– Decrease in survivor benefits (spouse’s/orphan’s pension, death benefit)
– Your 2nd pillar assets having been withdrawn, they become taxable in terms of assets

PLEDGE OF YOUR 2ND PILLAR ASSETS

Advantages:
– Optimisation of taxation through higher mortgage debt
– No reduction in pension at retirement
– No reduction in survivor benefits
– No tax on the levy (the tax will be payable at retirement if the capital is withdrawn)
– Your 2nd pillar assets remain tax-free in terms of assets

Disadvantages:
– Higher (but deductible) mortgage charge
– Higher amortisation (so that you can have the entirety of your 2nd pillar when you retire)

This is an insurance contract that provides you with protection in the event of death or disability for an agreed period of time, but does not provide you with a lump sum at maturity in the event of life.

 It can be concluded in the form of 3rd pillar A or B.

 It can be useful if the basic benefits of your 2nd and 3rd pillars are not enough to protect your loved ones, and can be used to pay off all or part of your mortgage in the event of death or disability.

Do not hesitate to contact our specialists for further information.

PROPERTY INSURANCE

When buying property, it is also important to look at additional insurance coverage. 

Hypo Advisors can assist you in analysing your current coverages and offer complements in all areas of insurance, and in particular:

• Property insurance for villas or investment properties
• Supplementary property insurance for PPE

• Owner’s liability insurance (construction credit)
• Household insurance (adapted from household inventory)
• Property legal protection insurance
  

Do not hesitate to contact our specialists for further information on this subject.