Buying property - in which order do you use cash, pension, insurance?

I’m eyeing buying a house, probably in about 2 yrs.

I had a look at an affordability calculator as well as a “free first session” with Moneypark to validate our finances and they look good:

  • we can commit cash up to 35% if needed (but why spend so much?)
  • we can cash out our 3a solutions (currently in 75-100% equity) or pledge them, or just do this partially, or not at all?
  • we can cash out our 2nd pillars or pledge them (with a lot of voluntary buy-in), or just do this partially, or not at all?

Where I’m a bit puzzled is: in what particular order is this considered the smartest?
My thinking is the following, then please correct me if I’m wrong:

  • pledge all 3a products to their entirety. If not possible, cash them out to 100% (this was their purpose, really)
  • pledge all 2nd pillar products as much as we paid in extra. If not possible, cash out only as much as we paid in extra (this was the purpose of buying in)
  • commit the rest in cash until “it’s enough” and not a penny more

As for reaching the 35% obligation in 15 years, I’d want to have it with putting away 3a’s as normal every year as well as use the savings on buy vs rent - and nothing more, ideally.

If the financing institution allowed every possible combination, what would be your thinking?
What if they won’t allow pledging or put much worse conditions against pledging? Would you cash out, and if yes, how much?

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Hi !

Where is your 3a ? VIAC ?

Cash Will reduce your wealth and then your taxes.

If possible I would no cash out 2nd pillar as this Will decrease 2nd pillar coverage for disability etc. (if I am right).

With current interest rates, I’d pledge as much as possible without cashing the pillar 2/3; and pay as little down as possible.

Also, I wouldn’t worry about the 35% – housing prices will keep increasing, so most likely you’ll reach the 35% without paying back a dime.

It depends on the specific rules of your 2nd pillar provider, in my case for example pledging or cashing out doesn’t affect the disability insurance, but it’s certainly worth checking.

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We used the opportunity to cash out Pillar 3a.
Stocks in 3a are less flexible and more expensive than stocks in the regular account.
Cash in 3a is less flexible than cash in your account, and offers less return than Pillar 2.
So either way there’s a better option.

For us, Pillar 2 is part of the safe portion in our asset allocation, instead of bonds. We did not want to touch it. We do the opposit and buy-in voluntarily.
It offers a safe and predictable return that is higher than the mortgage. If that changes, we can still take it out to pay down later.
We did offer to pledge it but banks said it’s not necessary.

When we decided that we want to buy we moved the 3a stocks to 3a cash and sold some stocks from the regular account to have 20% down-payment safe.

We now amortize the 15% of the second mortgage indirectly via 3a invested in stocks. Maybe we pay it back in 10 years or less, or take it out every 5 years or so depending how it develops. Just to take some risk out.

finpension and postfinance, does it matter?

No it won’t. Paying cash to buy property buys me property, but my net worth is the same (I now have less cash and more property, don’t I?)

And even so, reducing 150-250k cash on your NW is really peanuts in tax savings.

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The tax value of your property is usually 70-85% of the buying price. So using cash will actually reduce your taxable wealth.

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Right sorry i misread your 1st post.

Will the lender accept pillar 3 that is not in their accounts ? I mean, BCV would accept 3rd pillar only if you put it at BCV ?

That’s not correct, your property value is the same for wealth tax purposes, irrespective if you used cash or not.

So yes, using cash decreases your taxable wealth.

Except if you use it to pay back the loan, in this case no impact (because decrease in asset = decrease in liability)

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I think this depends on the canton. In Geneva taxable value = purchase price but I think that is an exception vs rest of CH

One thing to have in mind with MoneyPark is that they get a commission based on how high the mortgage is. So it is in their interest to encourage you to pledge as much as possible. That being said, pledging assets instead of selling them makes sense… when the assets are invested at a yield higher than the mortgage rate.

In that sense, it’s very reasonable to pledge your 3rd pillar instead of liquidating it, given that it’s invested mainly in equities. I’m not so sure about the second pillar though. You probably don’t get more than 1-2% on that, which is in the range of mortgage rates at the moment. So withdrawing it would make more sense in my opinion.

For what is missing to get the 20%, you may put up the cash, OR, if that money is currently invested you may use a margin loan. Rates at Interactive Brokers are 1.5% for the first 100k and 1% afterwards. Not a bad deal in my books.

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Thanks this is very solid advice :raised_hands:

This is an important question not to be underestimated.

I personally totally agree your comment above. If you pledge and start above the 66% level, as you say its required anyway within the 15years so, I think the decision to cash out now or later is just to be made on a) if your 3a is big enough already and b) the performance of those investments …not really a question of if but when (you will have to pay it eventually anyway, just time it with taxes etc). In the meantime, they will already evaluate anything invested at a factor of say 70% of invested value anyway making your gage higher to compensate this factoring. This may impact your estimates based on the size of your 3a.

I would not cash out my 3rd pillar for a property (or pledge it if it meant moving it from equities).

3rd pillar is the best investment vehicle in Switzerland right now. With the new providers VIAC/Finpension/etc. you can invest 100% of your 3rd pillar in equities and pay no dividend or wealth tax on the returns.

Yes fees are slightly higher than taxable equity investment (~0.4% vs ~0.1%) but these will reduce further over time and the non-taxability of the account offsets the costs.

I like the idea of pledging 2nd pillar and using the minimum amount of cash but have not yet purchased property myself to give advice with confidence.

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As long as you pledge or cash out your pilars, you cannot rent out your primary residence. To bear in mind in case you want/need to move out but cannot sell/do not want to sell yet

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I’m not sure if we’ve had the question/answer before, but…
Can you pledge multiple 3a accounts “in one go” (without consolidating into one), if they’re held with the same provider (obviously)?

Yes in our case
Several independant 3a accounts (regular 3a bank accounts and funds) are pledged at the bank where we have our mortgage

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It depends if you think factors outperform the market or not.

Cost of 3a:

0.5%-0.6% cost in fees + some non recoverable WHT + opportunity cost on cash

Cost of taxable:

~0.4% wealth tax
0.5% taxes on dividends.
0.3-0.4% cost in fees + some non-recoverable WHT

So if I expect the taxable factor portfolio to outperform the the market cap 3a portfolio by 0.7% per year, then it would make more sense to use 3a funds.

But then again, I could get more aggressive with factors in my taxable account.

If you are convinced you have market outperformance through factor investing or starting your own business etc. then yes that should weigh into your decision.

But otherwise I strongly believe 3a is the best compounding vehicles we have in Switzerland. Especially because I think 3a optionality is only going to go up, fees are only going to go down, and taxes could go up (debatable but developed world moving to be more progressive).

Also VIAC is only 0.45% for 97% equities now. And all WHT should be recoverable or have I missed something?

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I think there is still ~4% that is not recoverable, so maybe 10 basis points there. 3% cash costs around 15 basis points.

And it is also possible that (good) factor products get added at some point.

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