hi everyone calling on your collective knowledge and experience.
I was chatting to a colleague at work about mortgages and financing and he shared 2 pieces of information that I was not aware about and was wondering if anyone here has done this
On the Indirect Amortization via 3rd Pillar with the lender (bank), it seems that this can be invested in bonds or equities (via the bank). I was not aware about this and was always frustrated that this was sitting there earning 0.01% interest. We did use the Indirect Amortization mainly to have the 3rd pillar and save something on taxes but if there is more upside than we will consider this
On the mortgage “stop” it goes something like this example. Say we bought a house for 1M. we paid 20% down payment. Mortgage = 800K. At retirement age our debt should be ~65% of the 800K which is 520K. If the property was bought 10 years ago and has appreciated in value to say 1.5M, the 520K in debt represent only ~35% of property value because the house has appreciated so much. My colleague was arguing that once the mortgage renewal term arrives, you don’t need a mortgage anymore. This was doing my head in because somehow the debt still exists. I don’t really get it to be honest. Does anyone know what he was talking about ?
In any case I plan to visit my bank and try to clarify these 2 points.
yes it’s often possible to invest 3a money into stocks and bods. Banks might however allow different levels of risk for something that is pledged for the mortgage.
if the property appreciated in value (please bear in mind that we have been at very high valuations for a while now, a correction is not at all improbable) then you can stop AMORTIZING, but the debt is still there and you either pay it back or renegotiate and potentially pay only interests.
indeed the 3a can be invested. Our cantonal bank has 5 profiles to choose from which range from 100% bonds to 100% equities and 3 more balanced options in the middle with some real estate. the cost is actually quite sensible and the last 5 years the middle option has outperformed finpension by quite a lot, but not VIAC. (yes I know past performance is not a indicator of future performance but it’s a data point)
yes the amortization can be stopped each quarter (don’t need to wait until the term date of the mortgage) and of course you need to keep paying the interest. but it does mean more cashflow to invest elsewhere (VIAC, IBKR, etc.)
I hope this is helpful to others but do check with your particular situation and your bank.
I was puzzled when I read your responses, and then I noticed that there was an “in” missing in my initial question. What I meant to ask was why not go for 100% stocks with indirect amortisation over 15 years.
Your concern is founded. When using assets as collateral, it is important to find a good balance between stability and growth.
In the case of indirect amortization, the loan-to-collateral ratio is typically 80% of the value of your collateral. So you should use a portfolio that isn’t likely to lose more than 20% of its value even in an extreme crash. If it does, you will have to make additional amortization payments on top to bring your mortgage down to where the value of your pledged pillar 3a assets matches the required amortized share.
What does that mean in reality? Let’s say I have 90k 2nd mortgage to pay off in 15 years, so that’s 500.–/month. Would I then need to deposit, say, 600.– per month so the bank is satisfied if I wanted to go 100% stocks?
I learned you can fix interest rate (like I have) and still invest the 3a and stop the amortization. Your asset just needs to have appreciated enough to make the bank comfortable. In my case the bank even did not want to re-evaluate the property since the appreciation is so obvious in real estate where we live (we also bought 10 years ago)
No. The way it works is that the higher the risk of your collateral losing value is, the bigger the required security margin will be.
So, for example, indirect amortization with a pillar 3a savings account would not usually have any security margin at all. In other words, every 100 francs of pillar 3a savings account balance would equate to 100 francs of collateral. But a stock portfolio would typically have a security margin of 20%. That means every 100 francs of pillar 3a assets equals 80 francs of collateral.
The security margin shields the collateral against fluctuations in the value of assets.
We still have 4 years left on our mortgage and LTV minus pledged 3rd pillar is around 63% (conservative estimate).
I’ve had a similar discussion with UBS last week and the advisor told us that even if we reevaluate now, this wouldn’t liberate us from continuing to do indirect amortisation.
He also said that revaluations could be done only one every 5 year.
At this point I don’t know if he could not or would not stop any further indirect amortisation.
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