SHARE
COPY LINK
For members

COST OF LIVING

EXPLAINED: Why not paying off your mortgage in Switzerland can save you money

The idea is strange to most of us, but the majority of people in Switzerland choose not to pay off their mortgage - and save money in the process.

Several houses in the Swiss countryside. Photo by Eliabe Costa on Unsplash
Several houses in the Swiss countryside. Photo by Eliabe Costa on Unsplash

Many of us who have been raised with the goal of one day owning property will have one thing on our mind as soon as that deal is done: pay it back. 

From avoiding credit rating issues to not seeing the erosion of our hard-earned money due to interest, there are a number of reasons we want to get out of mortgage debt as fast as possible. 

But in Switzerland, due to a variety of factors, it sometimes makes more financial sense not to pay off your mortgage – or at least to pay off less than you can afford to. 

Estimates vary, but statistics show that a majority of Swiss do not pay their mortgage off before retirement. 

Not only that, but Switzerland has the highest mortgage debt per capita of any country anywhere in the world, according to OECD figures. 

READ MORE: Buying property versus renting in Switzerland: What is actually cheaper?

Here’s what you need to know. 

Why would you not want to pay your mortgage off in Switzerland? 

There are a number of factors which contribute to Switzerland’s unique framework when it comes to mortgages. 

These include the country’s wealth tax, the dual system of mortgages and traditionally low interest rates. 

At this stage, it is important to mention that while a majority of people don’t pay off their mortgage during their working life, this does not mean they skip out and run for the Caymans upon retirement (although presumably some do). 

Instead, it means people are not actively paying off their principal, but investing the funds in an account with their bank. 

When they retire, they use the money in the account to pay off their mortgage debt – and keep the change. 

This sounds complicated because it is – and is explained at length below. 

For more information on buying property in Switzerland, check out this link. 

The Swiss mortgage system: Dual obligations

The reason you may not want to pay your mortgage off in full in Switzerland is partially because of the unusual structure of mortgage obligations. 

The Swiss mortgage system differs from that in most countries in that you effectively take out two mortgages when you buy a property, or more accurately, the mortgage is split into two mortgage obligations. 

The first obligation resembles a traditional mortgage seen abroad, in that it has an indefinite repayment period and covers the majority of the purchase price. 

This will usually be around 60 percent of the total purchase price, less the deposit and the amount included in the second mortgage obligation. 

The second will cover approximately 15 percent of the purchase price. 

Importantly, this will have a fixed repayment period, usually around 15 years (at around one percent per year) or by the time you retire (if shorter than 15 years). 

EXPLAINED: How to save on your mortgage in Switzerland

While you must pay off this amount, the ‘optional’ part relates to the other component of the mortgage. 

Mortgage rates in Switzerland are low by international standards. Photo by PhotoMIX Company from Pexels

Should you choose direct or indirect amortisation? 

Amortisation is an accounting term which refers to reducing the book value of a loan or debt, but basically means paying off your mortgage. 

In most countries, the only option is ‘direct amortisation’, which means paying money to the bank to cover your debt. 

Direct amortisation not only reduces the debt, but the interest (as the interest is based on the quantum of the debt). 

Indirect amortisation is something relatively peculiar to Switzerland and is where the idea of not paying off your mortgage comes in. 

Finding a flat in Switzerland: How to stand out from the crowd

Swiss financial advice site Beobachter points out that the system in Switzerland is effectively set up to allow long-term non-repayment of mortgages. 

“In hardly any other country are the amortisation standards as lax as in Switzerland… In no other national economy can debts remain “forever” in this way”, they explain.

Instead of paying off the mortgage directly, you make regular payments into a ‘third pillar’, which is basically an investment account or fund offered by the same bank. 

This money is then used as a security against the property. 

Keep in mind the amount you need to repay will be the value of the property when you bought it, not the value of the property when you retire. 

During this time you will continue to pay interest on the debt.

This interest will not decrease as you are not paying off the principal, although Switzerland’s low interest rates make this an attractive option. 

Eventually, the debt will be taken from the third pillar. Usually, this will happen when you retire, but you can also sell the property, organise some form of reverse mortgage or sell it to your kids and have them rent it to you, among other options. 

Why is this beneficial?

The main reason this is advantageous is for tax purposes.

In Switzerland, you can deduct mortgage payments from your tax. Also, the money you pay into a third pillar is not taxable. 

Another major reason is the country’s wealth tax, which is not as unique but still relatively uncommon. 

Property: Why you can be taxed four times over for owning a home in Switzerland

In most countries, you pay tax primarily on your income. In Switzerland, you are liable to be taxed on your total wealth as well (under one percent per year). 

The wealth tax is calculated by your total assets minus your total debts. If you have significant debts – including a mortgage – then this will reduce your wealth tax. 

Importantly, the money in your third pillar does not count towards your wealth tax. 

Look, I just clicked on this article to find out about my mortgage, can you speak English please? 

While this all sounds incredibly complicated and you are advised to seek the support of a licensed agent, the calculus is relatively simple. 

Calculate the amount you would pay if you invested the money in a third pillar – keeping in mind the tax savings – by the end of the mortgage, minus the interest payments and the mortgage principal upon retirement. 

Compare this to the amount it would cost you to pay off the mortgage completely, including interest payments, keeping in mind that your tax savings will decrease over time as your regular payments decrease as you pay more of the mortgage off. 

Generally speaking, your financial advisor will present this to you as comparable percentages over time, which means your income will be a major factor in your final decision, as will your retirement plans and the tax rate in the canton and municipality you live in. 

EXPLAINED: How where you live in Switzerland impacts how much income tax you pay

It is important to note that your bank is likely to offer a combined form of both direct and indirect amortisation, which will allow you to spread the risk/burden somewhat. 

Editor’s note: Please keep in mind this report is intended as a guide only and should not replace legal and financial advice from a qualified agent or advisor. 

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.
For members

COST OF LIVING

‘Huge differences’: How you can save money on Swiss credit cards

Hardly anyone lives without a credit card these days, but have you ever thought of how much this little piece of plastic costs you each year and if you could save? A new Swiss survey provides the answers.

‘Huge differences’: How you can save money on Swiss credit cards

Most people routinely use their cards without giving any thought to fees and charges involved in each purchase.

This all the more relevant when you pay for goods and services abroad because your bank charges a fee for every transaction made outside of Switzerland  — typically, between 1 and 5 percent, depending on the terms of your contract.

However, a new study by an independent online comparison service Moneyland shows that “there are huge differences in costs and benefits” among various cards.

This finding is based on comparison of 168 Swiss credit and prepaid cards, taking into account “all relevant fees for the first two years of use, as well as Swiss franc to euro exchange rates” in 2022.

The study concluded that “many consumers could save hundreds of francs per year by changing their payment cards”, according to Moneyland CEO Benjamin Manz.

For instance, occasional users could save 560 francs and frequent users could see savings of more than 830 francs in the first two years if they were to switch to cheapest cards, Manz said.

Which card you ultimately choose depends on several factors. For instance:

The cheapest credit cards for travellers

If you frequently travel to foreign countries and spend 5,000 euros (equivalent of about 5,000 francs and 5,200 USD) outside of Switzerland every year, or withdraw 1,000 euros per year at foreign ATMs, your best bet is the Silver Multi-Currency Credit Card from Swissquote. It costs 292.05 francs over the first two years of use.

Next are the Gold Multi-Currency Credit Card from Swissquote (392.05 francs); the Coop Supercard Visa or Mastercard (458.95 francs), the Jumbo and Manor Mastercard credit cards from Viseca (463.55 francs), and the new UBS key4 Mastercard Standard (485.15 francs).

READ MORE: How to save on groceries in Switzerland

If you are an occasional user, meaning you spend 200 francs in Switzerland per month and 1,000 euros per year outside of Switzerland, you will get most bang out of the Poinz Swiss Loyalty Card and Swisscard Cashback credit cards.

The study found that over a two-year use, these cards give you more money than they cost you.

How can this be?

As Moneyland explains it, “the cost of using the Poinz card is -25.10 francs, and that of using the Cashback card is -12.30 francs. Both of these are American Express credit cards issued by Swisscard. The reason why the costs are negative is that the cash back rewards you get are higher than the total costs”.

Next the Coop Supercard (Visa or Mastercard), with total costs of 42.85 francs; and the Jumbo and Manor Mastercard store credit cards issued by Viseca, with total costs of 43.60 francs.

“All of the cheapest credit cards for occasional users are free credit cards in the sense that they do not have annual card fees”.

READ MORE: Six no-gimmick websites that help you save money in Switzerland

What about frequent users?

Moneyland defines ‘frequent’ consumers as those who spend 1,000 francs per month in Switzerland, and 5,000 euros per year in foreign countries. It also considers cash advances — five 200-franc withdrawals in Switzerland and five 200-euro withdrawals from foreign ATMs.

This particular group of people would benefit most from the American Express cards from Poinz Swiss Loyalty with total costs of 289.80 francs, and the Swisscard Cashback cards with total costs of 319.80 francs over the first two years.

Next are the Silver Multi-Currency Credit Card from Swissquote (362.05 francs) and the Coop Supercard Visa or Mastercard (454.75 francs).  

Prepaid cards

These are the cards with a credit limit based on the account holder’s deposit.

If you an “average” user, defined as someone who spends 500 francs per month of purchases from Swiss merchants, 2,250 euros per year of purchases from foreign merchants, and makes three cash withdrawals in Switzerland and eight reloads of your prepaid card balance per year, the cheapest card is the Neon Free Mastercard —which comes with the Neon Free bank account.

It costs 26.60 francs over the first two years.

Migros vs Coop: Which Swiss supermarket has the best bonus point system?

Other cheap cards are the Neon Green Mastercard (136.60 francs), the UBS key4 Mastercard Prepaid (216.40 francs), the Postfinance Mastercard Value (241.80 francs), and the Cornèrcard Energy (282.65 francs).

Using cards from digital banks like Neon “is particularly advantageous for travelling”, the study found.

“The reason is that many of these cards have much lower foreign transaction fees and better exchange rates than credit cards and debit cards from conventional Swiss card issuers and banks”, Manz said.

However, prepaid cards are not as widely accepted as credit cards, especially for hotel bookings and car rentals. “For that reason, taking at least one affordable credit card with you when you travel, in addition to cheap cards from neobanks or other debit cards, is a good idea,” Manz pointed out.

Another tip for travellers using Swiss cards abroad: “Always choose the local currency for card payments, and never Swiss francs…this lets you avoid high currency conversion fees”.

What else should you know about Swiss credit cards?

Another consumer comparison site, Comparis.ch, has also rated commonly used credit cards using its own criteria. You can see the results here.

READ MORE: Seven products that are becoming more expensive in Switzerland

SHOW COMMENTS