Indirect vs direct (+VIAC) amortization?

Hi guys,

I’m about to buy a house and I’m excited about it! The only question now is… about the amortization.

Until March 2021, my wife and I had had 2 3a contracts with PAX for ~4 years. When I got to know about the forum and the whole FIRE idea, I felt a little screwed by PAX and switched those 2 3a pillars to VIAC. They are doing fine but cannot be pledged for indirect amortization.

FWIW, I have a young daughter (plan on having more) so my wife and her depend on my salary. Thanks to my job, I could get a separate life insurance for CHF 266/year (CHF 500k insured), which seems pretty nice.

Now the question: I can either:

  • do as the bank recommends and start a PAX 3a for indirect amortization
  • go direct amortization and keep investing in the VIAC 3a for the tax benefits (+add the separate life insurance)
  • a combination of both with the least bad bank 3a for indirect amortization

As much as the bank’s trying to sell me the insurance, I don’t want to get trapped in that PAX 3a again, but I’m also not the most knowledgable guy out here.

Could you beatiful people help me?

1 Like

You might want to check UBS. They told me that for amortisation they would accept indirect amortisation via pledging UBS 3a Vitainvest funds. Would be similar to VIAC albeit with ~1% higher fees

Re life insurance. Have you considered if your employer’s 2P coverage is already sufficient?

Congrats on the expected purchase.

Best to me is indirect amortization

As other mentioned, check UBS.
UBS let you indirect amortize. You can do via active or passive VitaInvest funds. Passive is obviously cheaper.

Then after 5-10 years you can try to see if property has increased in value and if so, you may be to stop amortization all together

1 Like

Best would be max contribution to pillar 3a and direct amortization no?
But you need a very good salary…

Where did you get your life insurance? 500k for that price is nice.

Thanks for the answers!

But does taking an indirect amortization 3a with UBS mean that I have to go to UBS for the whole mortgage? Or would another bank accept the UBS 3a pillar for indirect amortization?

I really tried to put a number on both strategies to see which one is better, but damn! There are a lot of variables.

1 Like

I believe you would need to go to UBS for the whole mortgage.

Other option I believe it’s ZKB with Swisscanto funds, they may let you 3a indirect amortize.

@Ardius. I don’t understand why direct amortization would be best. Can you explain? To me, direct or indirect does not make any difference for either interest rate or affordability criteria. The benefit with indirect is that you can free this up if your property goes up in value. Plus the money are invested in stocks.

Whilst, if you go direct. Money are not invested. Potentially, you can still ask the bank for a fund release but again that money are not invested and if you then invest these, they wouldn’t be tax efficient as 3a has a yearly cap

1 Like

It’s worth checking but with a nonworking spouse and a child, it’s possible that the additional insurance is worth it. The worst case isn’t actually death but permanent disability with a need for special care.

CHF 266/year is cheap and may positively affect the interest rate offered by the bank/insurance on the mortgage. More importantly, in case of death or disability, the income of the family would very likely drop significantly, affecting the affordability criterium of the mortgage, meaning some of it would have to be repaid. Part of the money from the life insurance can be used for that.

As with everything else, the availability of a good support network (family and very close friends with the will and enough means to meanigfully help in case the worst happen) offers more security. With poor access to them (and even with it, I wouldn’t want to put high stress on my family if I can mitigate it), I know I wouldn’t sleep well with a 80% mortgage on my home, amortized indirectly and a blossoming family with no other source of income than my inputs.

I’m no specialist but the financial variables would be, I think:

  • The mortgage interest rate: the life insurance can play a role here so I’d put it on the table when discussing with the bank before deciding if the insurance is worth it or not, unless you need it to protect your family anyway and plan to take it no matter what.

  • Your marginal tax rate: mortgage interests are tax deductible, which is part of the attractiveness of indirect amortization. The total amount of the mortgage is also deductible from your wealth for tax purposes.

  • The amortization amount (I’m guessing a 15 years fixed mortgage?).

  • What percentage of a high stocks solution they’d let you use for their amortization calculations (stocks are more risky than cash, the ratio of the contributions to a solution invested in stocks needed to indirectly amortize would probably not be 1:1).

  • the fees incured by the stocks invested in their 3a solution (buying fees, selling fees, potential additional management fees and TER) vs VIAC’s fees.

  • the expected returns coming from investing the part you’d put into the amortization otherwise.

You can then compare a scenario with direct amortization vs one with indirect amortization for 15 years, where the 3a is withdrawn to pay off the mortgage after 15 years (in order to compare apples to apples). I’m sure the bank/insurance will be willing to provide you a simulation of both scenarii (I’d still double check it but it might be a start if you don’t know where to start yourself).

I’d keep in mind that house prices can go down and that the situation of your family will get reevaluated in case of job loss, death or disability on your part, making it worth it to check the affordability criterium and consider what happens if you must suddenly amortize a good chunk of the mortgage based on that.

Also note that if you use the money saved on amortization to invest, you would basically be investing on margin, meaning that if some of that money come due, you’ll have to sell your other investments no matter the timing to come up with the money. It changes the risk profile of the portfolio and should change what investments make sense in it, make sure you’re comfortable with that.

I personally put a lot of value on safety, sturdiness and simplicity, so even if indirect amortization is more advantageous, as the sole income earner of a family, I’d probably value direct amortization and reducing the size of the mortgage more.

3 Likes

Agree with @Wolverine. Plan for the worst, hope for the best.

@robinhood how big is your mortgage?

  • Is the 500k enough to bring down mortgage to 65%?
  • if so, how much would your family have left?
  • what is you 2nd pillar lump sum payout and yearly payment to your spouse in case of death and Disability?

One practice example. I am buying a property and plan for insurance too. However my wife works. Assuming she wouldn’t.

  • I would need ~300k to bring debt to 65% - so left 200k (if I use your numbers)
  • my pension fund would pay me lump sum of 80k + 110k/year (full disability) or death (split 90k wife and 20k daughter)

So in this case, house debt is down to 65%. My family would need to pay only interests. They would have 280k aside + additional savings if you have.

In this case, can your family live on this amount? Would they could cope with interest rates rising to 5%?

I would ask myself these questions. Then you have few options:

  • direct or indirect. Direct if you prefer to reduce overall debt ratio faster
  • increase life insurance payout - maybe a progressive one (starting at 750k going to 500k after 15 years - so you would pay less premium)
2 Likes

Thanks @Wolverine and @SteveDB.

House would cost 1M.
Mortgage would be 800k.
I would need to amortize 134k within 15 years.
My wife works part-time (50%) and earns 50k.
Even if I withdraw my 2nd pillar completely for the mortgage, today, they would pay my wife 43k + 7k (child) annually in case of death/disability.
If we take into account the 500k insurance payout, that means my wife could easily bring the mortgage down to 65%, have some 350k aside and earn 100k annually, assuming she would be able to keep working as she is now.

But then again, if she diminishes her work percentage even more because of one or two additionnal children + the interest rates go up to 5% (40k annually), that is indeed not an ideal solution.

1 Like

You seem to have a life insurance on you only, because you earn the higher salary.
Perhaps it is worth considering also the very unfortunate case where your wife dies, and you have to cope with the financial and life consequences (possibly leading you to reduce your % working time). A life insurance on her may be useful.

By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, vous confirmez avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/