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More than 36% of all Swiss citizens already live the Dream of owning your own home. For many of them, home ownership also represents a considerable part of their retirement provision.
For many other people, however, the dream of owning their own home seems to have Costs of financing the property to fail.
Many people do not realise that they can make their dream of owning their own home easier by pledging their pillar 3a. This procedure can make the Required equity ratio reduced from 20% to up to 10% be
How the Financing your own home with pillar 3a You can find out exactly how an advance withdrawal of pension assets or a pillar 3a pledge works in this article!
The planned abolition of the imputed rental value could change the tax attractiveness of mortgages and indirect amortisation from 2029. As details have not yet been finalised, this article is based on the currently valid system. Always check the latest tax rules before making a property decision.
The Pillar 3a is basically a voluntary pension scheme and should not be drawn until retirement. However, there are some Exceptionswhich have a premature withdrawal of pillar 3a funds allow.
Financing your own home is seen as a sensible addition to retirement provision. Accordingly, the money from pillar 3a can be used to finance a home before normal retirement age.
Classically, the Use of pension assets for home financing via a so-called Advance withdrawal from. In this case, the money is withdrawn from the pension pot and capital withdrawal tax is due directly.
The money withdrawn now serves as cash, i.e. helps with equity and can then be used for financing.
As an alternative to the classic early withdrawal Pension assets also pledged be transferred. The money remains with the pension fund and serves as additional collateral for the bank when financing the mortgage.
As pension assets are considered to be very secure, banks allow a higher loan-to-value ratio in the event of a pledge when financing a home. Up to 90% Debt capital are now possible. Conversely, this means that you can now only 10% Equity you have to raise.
The pension assets are only actually withdrawn if the interest payments for amortisation are no longer paid. In other words, if you were in financial difficulties.
However, the pillar 3a pledge does not only have advantages, so let's compare the two approaches:
| 3a Advance withdrawal | 3a Pledging | |
|---|---|---|
| Advantages | - More equity available - Lower mortgage - Lower interest charge. | - Less equity required (10%) - Lower taxes due to higher mortgage debt - Continued interest/return on pension assets as they are not withdrawn - Retirement assets in the pension scheme remain intact |
| Disadvantages | - Capital withdrawal tax due directly on withdrawal - Lower retirement assets in the pension scheme - No repayment possible in pillar 3a - Fewer tax deductions possible due to lower mortgage | - More expensive mortgage due to higher borrowed capital - More difficult affordability due to higher borrowed capital - Risk of pledge realisation |
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Under the current Swiss tax system, mortgage interest can be tax-deductible. (With the planned abolition of the imputed rental value, this could change to some extent from 2029). Many Homeowners keep their mortgage as high as possible for as long as possible. By the time they retire, however, most people want (but don't have to) be debt-free and pay off their mortgage.
The repayment of the mortgage is referred to as amortisation and here, too, a distinction can now be made between pledging and early withdrawal.
If the debt is repaid directly to the bank, for example after an early withdrawal, this is referred to as a direct amortisation.
A Indirect amortisation runs via pillar 3a. You continue to pay into pillar 3a and the amount of the mortgage debt does not change. The money is only used for repayment later, for example on retirement or when the mortgage matures.
| Direct amortisation | Indirect amortisation | |
|---|---|---|
| Advantages | - Decreasing costs for interest and mortgage - debt decreases (affordability becomes easier) | - Large tax deductions for mortgage still possible - payments into pillar 3a can still be claimed for tax purposes |
| Disadvantages | - Lower tax deductions due to lower mortgage - Capital used for retirement provision and other projects | - Mortgage interest costs remain high - Debt remains high (check affordability on an ongoing basis) |
Let us look at the Comparison for a non-denominational, single person in the city of Zurich with a gross income of CHF 120,000 per year. The mortgage is taken out at 1.5% interest and is to be amortised over 15 years.
For indirect amortisation, CHF 7,000 is paid into pillar 3a each year and invested there in shares with an annual return of 5%.
| Direct amortisation | Indirect amortisation | |
|---|---|---|
| Mortgage | CHF 150,000 | CHF 150,000 |
| Pillar 3a deposits | - | CHF 105,000 |
| Mortgage interest | CHF 18'000 | CHF 33'750 |
| Tax savings | CHF - 4'622 | CHF - 36'195 |
| Capital benefits tax 3a withdrawal | - | CHF 8'577 |
| Surplus capital | - | CHF - 8'602 |
| Net costs | CHF 163'378 | CHF 102'530 |
In this example, the indirect amortisation therefore CHF 60,848 cheaper than direct amortisation.
Notice: Payments into pillar 3a are limited to a maximum annual amount. If you would like to amortise more, you can consider making a purchase into the pension fund.
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If you too would soon like to be one of the third of Swiss people who own their own home, there are exciting opportunities for you with pillar 3a.
Whether a Advance withdrawal or a Pledge You should check carefully whether the direct or indirect amortisation is better for the financing.
Often the Indirect route via pillar 3a more attractivebecause money can then still be invested in shares. However, you should approach the calculation of home financing for yourself and check the comparison of amortisation based on your options.
Hello Eric, the article does not mention the effects of the abolition of imputed rental value and the fact that interest on debt, including mortgage interest, can no longer be deducted (except to a limited extent for new buyers). Investments in the house can also no longer be deducted by the federal government. And at cantonal level, it is not yet entirely clear whether certain items will still be allowed or not (e.g. the environment).
The whole thing comes into force on 1 January 2029!
So you have to think about how you want to deal with this now. Or no longer plan the mortgage interest deduction as a fixed tax saving over the mortgage term.
Good point, thanks Jan. The article is a bit older, I'll see if an integration makes sense, or if a whole new article makes sense!
"A mortgage costs interest, but reduces the tax burden." So far correct, every bank will tell you that. But what your bankster won't tell you is the following:
Assumption: property, value 500K, 400K mortgage at 2%, i.e. 8K mortgage that you can deduct from your taxes, income 100K. Let's assume a marginal tax rate of 25%, then you save 2K in taxes. So you pay 8K mortgage, save 2K tax, leaving net expenses of 6K + maintenance of the property.
Same property, debt-free: you pay 2K more tax, but save the 8K mortgage interest. Maintenance etc. remain the same. The bottom line is that you have 6K more in your account.
And if you don't want to give the money to the taxman, you can also donate the corresponding amount. You get exactly the same deduction.
Of course you can argue that it is better to have the (cheap) mortgage and invest the additional equity. This may also work out in the long term, but this calculation usually forgets something important: The risk. If you invest 400K in the stock market today, prices can plummet 50% the day after tomorrow and take years, or even decades, to recover (example, 60s, oil crisis of the 70s, Japan). The recovery can take much longer than your fixed-rate mortgage runs. And if the bank then comes up with the idea that you need to inject more equity in the short term, you have a problem. You can do this if you have enough money to repay the mortgage out of petty cash at any time, but not if everything is on the edge.
By the way: Have you ever read a mortgage contract? Read it properly, including the small print? That's the finest rubber. If interest rates rise massively, the bank will always find a reason to cancel your "fixed-rate mortgage". There are so many clauses that can be interpreted. Have some fun and read through them with a critical eye. And remember the old saying "A banker is someone who lends you an umbrella when the sun is shining, but wants it back as soon as the slightest cloud appears"
Many thanks for the entertaining additions, Alain 🙂
Of course, the risk should never be forgotten. But let's stick to the facts: In the last 90 years, there have only been three 10-year periods in which our stock market posted a negative return (Source). And even in these three exceptions, the return was only between 0% and -2.5%. Positive returns were achieved in all other periods.
10 years should be a good guideline for the example with the fixed-rate mortgage. It looks even better for longer periods! 🙂
Greetings,
Eric
Hello, Eric.
Thank you for this valuable contribution. I have the following questions; 1) does a pledge automatically mean indirect amortisation?
2) If I amortise indirectly & keep my 3A balance invested, it is theoretically possible that I could be in the red at the end of the term, i.e. after 15 years (unlikely, but theoretically possible with a high equity ratio in the 3A custody account).
How do you see it?
3) Can you give an example where pledging or indirect amortisation would not be financially worthwhile?
Love!
ps: diligently recommend your expertise! 🙂
Hello Dion,
1.) Pledging and indirect amortisation: Pledging pillar 3a does not automatically lead to indirect amortisation. In the case of a pledge, the pension capital serves as collateral for the bank, but the capital remains in the pension fund and is not automatically used to repay the mortgage. Indirect amortisation means that you continue to make contributions to pillar 3a and only use them to repay the mortgage at the end of the term, usually on retirement.
2.) Risk with indirect amortisation with shares: It is true that with indirect amortisation, where the 3a assets remain invested in shares, there is theoretically a risk of loss. This depends heavily on market conditions. In the long term, however, equities offer a positive return, and historically there has not been a 15-year period with a loss on the Swiss equity market. However, this is no guarantee for the future.
3.) Exemplary situation in which a pledge might not be financially worthwhile: If mortgage interest rates rise very sharply and stock market returns are very poor for a very long time.
I hope these additions help you 🙂
There are a few mortgage providers who even allow 100% gross loan-to-value. So if you have enough 3a account/deposit/policy (or 3b policy) to pledge 10% of the purchase sum and secure the other 10% by pledging the pension fund, this is possible. However, affordability is often a problem with such a high mortgage, as a lot has to be amortised directly/indirectly and this is included in the calculation.
So the basic message of the article is absolutely correct, there are alternatives to the classic 80/20 model!