Rent out if it wasn’t obvious
This whole website is named after the blog of a rich guy who keeps blogging. What do you think MMM’s net worth and income looks like?
OK, you got me, didn’t think about MMM, but he’s a special case. I think he retired with a net worth of around 1 million, which is well within the expected boundaries I had in mind. Also, he is/was very frugal, spending like $25’000 per year in total. I would be surprised to see him rent a house for $8’000/month.
And now his blog is one of the most popular in the world about FIRE, so now he probably earns a lot of money with it.
I bought my flat in 11/2015 for 26x annual rent. My wife and I amortize (indirectly to pure cash Pillar 3a) 1000 CHF a month and another 1000 CHF covers expenses and mortgage costs. In 10 years from now, the flat will be full amortized (meaning the bank owns the remaining 65%) at which point we move our 3a’s to VIAC or similar. The tax burden of Eigenmietwert is another ~200 CHF a month.
Own flat was a great decision. King of my castle and so on.
I used to live as a flat owner back in Warsaw and as a tenant here in Switzerland. I would say renting is far superior. In Warsaw everything would work on my nerves twice as much, because I knew this was the place I chose, and selling would not be easy. So, loud neighbors, cars parking outside, far way to work, it was all really far from ideal. And when you rent, you know you can move out just like that. If you rent from a company, and not from a private person, then there is really nothing to worry about. I really don’t get this “king of my castle” argument.
However, the Warsaw flat proved to be a good financial decision. Paid 250’000 PLN for it, now it could be worth 400’000 PLN. Plus all the rent that was saved. Of course in hindsight, it still would have been better to rent and buy some ETF.
Being a tenant doesn’t necessarily mean you get the choice where to move and when to move. I had to move out of my first flat here in Switzerland because the owner changed and had other plans for my flat.
I was an owner in Warsaw but eventually sold the flat and used the money to finance my mortgage here. Renting in Warsaw wa a pain as tenants changed often and the general approach to renting is not so long term as here. Can’t blame them though as the commute through Warsaw can be 1h in traffic jams if you are poorly connected. Then again, most people have a goal to eventually buy as annual rent to ownership price ratio is significantly in favor of owning instead of renting.
My appt in Switzerland is a different story though. It’s new construction, so we had our word for all the furnishings, something you usually don’t get with renting. The location is great, I don’t waste even a single minute in a traffic jam. The biggest part of it is however non financial. It’s a new “quartier” with mostly young families. My son is free to roam around, has tons of friends (and so do we) and is now fully bilingual. The 300m^2 garden helps as well. We basically live outdoors for half of the year and I’ve already lost count on how many bbq parties have we already had this season.
Do I sense a Mustachian BBQ party?
Mustaches obligatory ;-). I’m near Bern. Wont mind a meetup!
Note that you’ll be paying taxes on Eingemietwert as soon as you buy the property, not only after paying back the mortgage. And no, it’s not a good idea to keep paying the mortgage interests to deduct them from the taxes, as most Swiss people will tell you…
Everyone I know tells me this. Why don’t you recommend this and what else should you do?
The basic reason not to keep debt is that you’ll pay more in interest than you’ll save on taxes (marginal tax and wealth tax).
On the other hand, mortgage is cheap credit. Where else can you get that much cash freed up with 1-1.5% interest? If you can invest that money with better return, you win. I’ll try to follow up with some realistic numbers later on
To keep it simple, i decided to ignore the impact on wealth tax.
Basic reasoning is, that if you have the cash to pay back debt, you will start with -X of debt and +X of cash, so it zeroes out.
There are of course exceptions to this, as you could, for example, use Pillar 2 or 3a to pay back mortgage, but in this case your actually increase your taxable wealth as capital deposited in Pillar 2 and 3a is not taxed, but will get taxed onced cashed out!
Mortgage amount: 500’000 CHF
Interest (at 1.5%/year) = 7500 CHF
Marginal tax rate = 35%
Total = Tax savings - Interest = 2625-7500 = -4875 CHF
If you invest 500’000 CHF with an average annual return of above 1% per year, you are better off not paying back the mortgage. Should the rates go up to 5%, it’s still enough to get 3.3% return on investment to be better off not paying back the mortgage. I guess the Swiss are right! (or I’m very wrong with my calculations)
but average annual return of above 1% per year after taxes
If I were you, I would look into an indirect amortization of the debt, i.e. you open an account where you stash money for the repayment of the debt. This stash is invested with a rather conservative allocation (not sure the bank will agree to let you go 100% stocks) and at the end of the mortgage term, you can repay debt using this account.
To sum up, you profit from the tax deductions of the interests while stashing cash for repayment and then at the end of the contract term (for example 10 years), you can decide whether you would like to repay some debt or further stash cash on your indirect amortization account.
Talking to some homeowners in Switzerland I keep hearing that never paying off your martgage is the way to go, because having debt is good in Switzerland in (terms of taxes?).
I never liked this idea, what happens if you die? You pass the mortage = obligation to your children? crazy.
Is there a way that paying off a house makes sense in Switzerland?
I’ve also heard this, and even someone who explicitly said they were going to pass down the mortgage (and house) when they die.
Given the cost of debt, inheritance taxes, etc, I would be curious to know how that makes sense, or could even work out to be better than paying it off, as they claim.
Mortgage loan is a leveraged investment. For example, you only put 400’000, but you buy a flat worth 1’200’000. So all the profits (and losses) get multiplied x3. Yielding 3% on your investment is not so exciting, but yielding 9% sounds tempting.
I have no idea about inheritance tax, but I just read that children are exempt.
Anyway, surely the children have a choice if they want to inherit something, or not, right? So they can do their own calculation.
It makes sense if you are not investing, as the effective interest after tax deductions is still higher than inflation or cash based 3a.
It could also make sense if you want to minimize the risk of a margin call. Some areas have seen dramatic housing price increases. In case of a strong market correction, the equity may become negative (eg. house value lower than the mortgage value) and the bank may request a repayment of this difference. Having low mortgage or no mortgage will minimize this risk.
Third argument I can think of is liquidity. It is more difficult to sell a mortgaged house, as the buyer may already have a mortgage agreement of his own etc. or your mortgage has worse condition than currently available. Then, you could be forced to pay back all the interest of a fixed term mortgage for the remaining duration (imagine having a 20y fixed mortgage for 1M CHF, they exist!).
I think that is the main point. Most people in Switzerland will amortize because they are not investing. I do not know many people in Switzerland that are investing. Therefore, for them it makes sense.
Most people amortize because they have to :-). The mortgage amount should not exceed 65% of property value.
I invest, but also amortize. My reasoning for this is I want to be free with my choice of mortgage providers once my fixed term runs out, and only having <65% property value to mortgage is likely to qualify me for better rates as compared to 80%.