We are finalizing the optimization of the mortgage financing structure. Your feedback are welcome !! I find it’s not easy because, regardless of the time (2y → 10y) and rate you choose, there are many other options available
— CONTEXT —
Buying a primary residence in Lausanne, mortgage of CHF 1,292,000, amortization of CHF 20,000/year.
Unmarried couple with children + We have meaningful savings capacity beyond the mandatory amortization.
— MY STRATEGY —
I’m going with direct amortization and continue to invest in parallel in my 3A pillar (VIAC)
Advantage :
Actual debt reduction each year
I believe it can also be considered a secure investment with a return equivalent to my mortage rate (1.43%).
We can contribute to invest in Pillar 3a up to the annual cap in parallel for the tax deduction.
— QUESTION 1 — DIRECT VS INDIRECT AMORTIZATION —
Does anyone see a reason to switch to indirect? My feeling is that direct amortization + a good Pillar 3a (VIAC) gives the best of both worlds (debt reduction + tax leverage), without the constraints and costs of an insurance policy tied to indirect amortization (or a bank-managed pillar 3a).
— QUESTION 2 — PURE RISK LIFE INSURANCE —
The bank insists on having an insurance policy in place (initially in the context of indirect amortization, but not only). I understand the logic, but in our situation:
Two similar salaries— if something happens to one of us, the other can carry the mortgage
One of us has a 2nd pillar — so some death/disability coverage already exists
We have an “emergency” fund
Question : Does the life insurance actually cover a meaningful residual risk for us? or is it mainly a guarantee for the bank? Moreover, these policies also seem pretty opaque to understand…
Any feedback or personal experience very welcome, thank you!
In the case of death of you or your partner, I guess the survivor would probably NOT inherit from the other, but your children would inherit (it is my understanding that unmarried couples are not inheriting by default, or pay a high inheritance tax if defined as heir in a will).
For this case, it may be helpful to have a life insurance with the other spouse as beneficiary. I believe that such a payment from life insurance is not included in the estate of the deceased. It would provide a cash cushion to the survivor, possibly useful to provide the children with a cash part of inheritance, without needing to sell other assets.
It seems especially useful to have an insurance for the death of the one who doesn’t have a good 2nd pillar…
@Snipy Your thoughts seem logical and make sense to me. As mentioned by @nabalzbhf I assume you already have designated the partner as beneficiary of 2nd and 3rd pillar.
In their respective wills, unmarried couples can restrict the inheritance of their children to the réserve héréditaire/Pflichttteil and designate all the remaining assets to the partner. Of course you have to pay inheritance tax on this amount, but it allows the partner to freely use the money.
As an alternative, you could check with your local APEA if kids could inherit more and then contribute to the amortization of the mortgage. The advantage would be that there is no inheritance tax on childrens’ inheritance. But this is a pure theoretical thought of mine, no practical experience.
I fully agree.
In general, SafeSide is considered a good candidate for pure life insurance. Turtleneck is another neo insurance, but not many reviews available.
I do the same with direct amortization and yearly max 3A; plus yearly buy into Pensionskasse (PK Lücke). Win + Win + Win
Life insurance: run the numbers; if you can easily cover the mortgage, don’t take one. But consider: 1) How much less would you earn, were you suddenly a single parent 2) Dito your partner would be invalid (more probable than death and on a financial point of view even worst)
Unmarried with children, mortgage, etc: talk about it with a notary (separation, death)
In my opinion, the highest risks are: the partnership ends or one partner gets invalid, death comes third.
First of all, thank you so much for your answers and your outside perspective. that’s what I love about this forum (and no judgment!). The first thing I’m going to do is check who the beneficiary is for my 2nd and 3rd pillars!
2nd thing
Life insurance: run the numbers; if you can easily cover the mortgage, don’t take one.
If we’re only talking about the monthly payments, then yes, we can manage them with a single salary and we have “emergency saving”. However, we would no longer meet the mortage conditions, especially the requirement that payment must not exceed 33% of income.
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You’re right, there’s also the risk of the couple separating! In that case, I imagine the concept of life insurance isn’t relevant, , and the only question would be how to handle the property (resale, buy out the remaining 50% or the mortage). it’s true that we hadn’t thought about those consequences. If you have any information, don’t hesitate
@peppa, What do you mean by “plus yearly buy into Pensionskasse (PK Lücke)”? Life assurance?
Thank you !
PS : I have a second topic to discuss: the length of the loan term. I’m searching if there is a thread to talk about that else I create a separate thread for it
Not a big issue. Bank don’t tend to continuously check the requirements as long as you make the payments on time.
Simply make an agreement between the two of you. No legal requirement to involve a lawyer. Of course, if you would prefer to have your agreement checked for any legal impossibilities, you can become member of an association such as https://www.hev-schweiz.ch/ or https://casafair.ch/ . From what I know, they offer legal advice.
How can you amortise CHF 20000 per year indirect? Isnt’t indirect amortisation capped at 3a limit (or x2 as couple)?
With indirect amortisation, more funds are available to invest through IBKR or similar? Debt reduction brings you 1.43%. Same amount invested should bring more, not?
My thoughts are:
Indirect amortisation is best when cash flow can’t cover amortisation + full 3a payment
Direct amortisation is best when cash flow can cover amortisation + full 3a payment and you wouldn’t do any investing, opportunity costs are what interes the bank pays.
Indirect amortisation is best when cash flow covers amortisation + full 3a payment and you will invest the funds available in the market (lets say 3.5% yield)
(assumtion I made: indirect amortisation possibel in a passiv fund scheme at a bank, lets say UBS passive fund 3a or similar).
I wonder if one has unpaid pillar 3a from past year (2025 currently, and more years in the future), the indirect amortization can be > x2 as a couple. Not sure how banks handle this currently and in the future.
Indirect can be better if you find a bank with a ‘mortgage acceptable 3a’ (TER under 0,75%, 100% Global Stocks) and if you invest the amount you would otherwise use for Direct in global stocks. I went for this option and when I ran the numbers for our case, we should get around 120k extra using Indirect over 15 years (assuming a compounded interest rate of 6%, mortgage avg. rate of 1,5%, tax saving of 0,63%, and factored in all extras such as 3a fees in both scenarios, tax savings, etc).
The expected outcome and math here is that you should get a double compounded effect, first on the 3a money and second on the extra money, the ones you don’t use for indirect, but you invest in global stocks. To put if from another angle, you borrow mortgage money at 1,5% interested (assumed) and invest it in equity at 6% profit (assumed), and in most cases, even considering extra costs, you could be better.
The bank should not decide here, there are many other banks and it seems you have enough assets to get good offers from other banks. Life insurance you could take separately, choose provider etc. but it looks you don’t need it.
It seems to me that if the amortization amount exceeds the Pillar 3a limit, then either part of it is amortized indirectly and the remainder directly, or it may be possible to choose a mix of Pillar 3a and Pillar 3b (to be confirmed…).
However, in our case, if we had chosen indirect amortization, it would not have been an issue because my wife is self-employed (and therefore has a higher contribution limit).
If you can afford to max out the pillar 3a anyway, then there is little benefit in using indirect amortization. Indirect amortization is primarily beneficial for people who could not afford to both service a mortgage and max out the pillar 3a. You can find some examples here: https://www.moneyland.ch/en/mortgages-direct-vs-indirect-amortization
It is worth noting, though, that it is perfectly possible to use a pillar 3a investment solution for indirect amortization. There is no need to settle for a pillar 3a savings account or, worse yet, get a pillar 3a cash-value life insurance policy.
Answer to question 2:
The “risk” is equal to your income. If your income is already adequately insured, as might be the case if both of you had pension funds with exceptional supplementary survivors pensions, then there is no need for term life insurance. But if one of you dying would result in a gap in your household income, then getting term life insurance to close that gap is worth considering.
If you have a mortgage, then it is essential that household income would still meet affordability requirements after a death. Term life insurance can be used to lower the outstanding mortgage, thus reducing affordability requirements to a level that one income earner can reach.
That was actually my topic (well, a Mustachian member shared it with me ). We also each have an emergency fund that can be used to pay off part of the mortgage / reduce the outstanding mortage.
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). We also each have an emergency fund that can be used to pay off part of the mortgage / reduce the outstanding mortage.