Mortage, amortiaztion and Pillar 3a


#1

I have a mortgage with UBS for a total of 512’000 with 350’000 fixed until the end of 2024, and another 162’000 in Libor. I have a total of 96’000 to amortize (remaining 65% will be the mortgage) and I planned to have this done before my fixed mortgage renewal is due. The reasoning behind this is that I will have a stronger negotiating position and the possibility to move my mortgage to a low cost provider if needed.

I amortize indirectly to UBS 3a accounts (plain, no investment funds) and I have initially planned to amortize to multiple 3a and cash out in 3 consecutive years. The advisor tried to convince me several time to invest in their 3a funds, but the TER of 1.72% is just too much.

I’m now considering switching to direct amortization, and starting my 3a investments with VIAC. This way I will still profit from tax deductions, while my amortization goals will stay unchanged.

The negative side of this is that I will miss out on any capital gains on cash used for amortization. With current Libor rates, my return on this amount will be a poor 0.85%/year.

So to sum it up, my options are:

  1. Keep amortizing to plain 3a at UBS and cash out when due
  2. Switch to fund backed 3a at UBS and risk that my amortization plan will fail due to stock market underperformance
  3. Amortize directly and go with VIAC 3a starting 2019

What would you do? (Edit: I recommend jumping straight to post number 10)


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#2

I want to make sure, I understand you correctly. What confuses me is that you amortize to plain 3a at UBS and cash out when due. At the same time, you write above that you amortize indirectly with UBS 3a accounts.

As I understand it, the advantage with indirect amortization is, that you “pay off” your mortgage by putting money in your 3a as collateral and let the mortgage - with its interest and interest deductions - stand. From what I understand, this might make financial sense (combination of tax savings from 3a and interest deductions). This makes switching mortgage lenders harder, however.

I don’t quite see the longer timeframe - without which investing in shares puts you at the mercy of volatility. Indirect amortization might provide it, but direct amortization? @nugget made a suggestion in the other thread.

Paying cash into a 3a and liquidating it every 5 years does give you quite a nice (risk-free) return after taxes, even with a rather low interest.

So, I would do a) (if I understand you correctly), but keeping it at an institution with a higher yield on accounts (if that is at all possible).

(It was not a question, but when you go mortgage shopping: Don’t limit yourself to banks - with their capital requirements and business models, they often offer worse conditions than insurance firms or even Pensionskassen. Also watch out, that you usually need to switch all mortgages more or less at the same time. Maybe you already know all that.)


#3

This is indeed what they call indirect amortization. My plan was to put in the full yearly amount and liquidate after every 5 years of payments, with the goal to take my mortgage down to the legal 65% level as fast as possible.

The UBS offer was the best I could get at the time I was shopping for mortgage, but I want to be ready when renewal is due. This 65% goal would enable me to move providers easily. Also, I’m somehow dubious if they will take VIAC as collateral.


#4

The money is not at VIAC, but at WIR-Freizügigkeitsstiftung - one of the larger players.
Edit: The correct name is: “Terzo Vorsorgestiftung der WIR Bank”

Banks want you to amortize down to about 65%, yes. So you need to pay it off / liquidate the account? Just giving the amount as 3a-collateral is not sufficient? Or is this what you want to do?

By the way - did you consider at all solving the situation with the PK? The money there has generally a lower yield and you would then be free, how to invest a 3a (if at all).


#5

PK? You mean the 2nd Pillar? I already cashed it out on apartment purchase.

And yes, it’s sufficient to pledge 2a/3a or other assets at a bank and keep the mortgage at 80% forever. This is what they will happily do as it’s in their interest.

However, If I want to switch to a low cost provider such as Hypomat
https://hypomat.glkb.ch/online-hypothek/hypothek-aktuelle-zinsen?6

They will only finance the 1st Mortgage, that is up to 65% value so any asset pledging is out of the question.


#6

Ok, ok. I may be a bit slow here. So:

  • End of 2024 (in about 6 years) amortization needs to be at 65% (first mortgage only)
  • End of 2024 no asset pledging to keep you flexible
  • Second pillar cashed out
  • You seem to be able to amortize indirectly to a UBS 3a account (until 2024)

In option 3) you just pay off the mortgage annually and use your 3a for VIAC, right? You have that additional money, right?


#7

(edited with correct numbers)
Exactly. I already have my plain 3a’s at UBS which I will cash out before my fixed mortgage is due for renewal, this will be around 24’000 CHF. I will amortize 1000 CHF a month, so in 6 years will have reduced the mortgage by 72’000 CHF. I will also pay into 3a with VIAC and invest whatever is left in ETFs.

In 2024, I will be able to move to Hypomat which I expect will give me 0.25% better rates than UBS. To simplify calculations, this will mean 1000 CHF/year saved on interest with a mortgage of 400’000 CHF.

If I were to invest 600CHF/month instead of amortizing directly AND would get the expected 6% annual return, I would be ahead 6’000 CHF in 6 years. (edit: this is not true, the money will be invested in the stock market through VIAC, instead of CT).


#8

Good, now I understand it better.

I would absolutely not do solution 2) due to the time horizon and the UBS fees.

The advantage of solution 1) as to solution 3) is the interest deduction, but you pay more interest (as a total amount). You would, however, be able to invest the additional money (which you also have in solution 3) into the stock market (outside of 3a). You can invest there with lower fees, but pay for it with the higher interest (as you do not pay off the mortgage immediately).

With solution 3), you go earlier in the stock market with its potential higher returns and start paying off immediately, meaning lower future interest payments which could again be invested and bring you returns. The way I understand solution 3, you would separate the mortgage paying-off from your tax-advantaged investing.

In your situation and your tax bracket and thinking things over, I think solution 3) might be the best solution: You can be sure of less interest burden and have potential higher returns, without problematic dependencies. The saved interest allows you to reinvest and profit from cheaper prices should stocks fall.

Did I put that clearly (I have my doubts…)?

And let’s see what others think.


#9

Yes, that\s pretty much what I had in mind. Thanks for wording it clearly.

To keep my target intact, with solution 1) cash goes to plain 3a, with solution 3) similar amount of cash is spent on amortization. We can assume that any interest tax deduction are miniscule at today’s rates. We can also assume that in both cases similar amount of money would be invested in the stock market (in case 1) through CT, in case 3) through VIAC)…


#10

Options 1 and 3 in bullet points, with simplified numbers to ease calculation:

  • Keep investing 1000 CHF/month to plain Pillar 3a’s (two persons) for 6 years, interest 0.2% per year. Tax on withdrawal 4.5%. Result : 69’100 CHF
  • Invest 1000 CHF/month via CT with 6% annual return. Result 83’700 CHF.
  • Save tax on interest. Miniscule due to current rates. I estimate 800 CHF tax total over 6 years. More if rates rise.
    Total 153’600 CHF
  • Amortize directly 1000 CHF/month. Result 72’000 CHF
  • Invest 1000 CHF/month via VIAC with 5.5% annual return (I estimated 0.5% lower return than CT due to higher management costs). Result 82’656 CHF.
  • No tax saved on interest. Edit: Progressively less tax saved on interest. Estimated 400 CHF.
  • Interest saving on mortgage payments a minimum of 1760 CHF over 6 years assuming constant Libor @ 0.85%. More if rates rise.

Total 156’816 CHF

Seems pretty much identical or have I overlooked something? Edit: After a couple of correction option 3 seems to be the winner. Obviously it is also safer should Libor rates start to increase. I (with some help from @cray - thanks!) pretty much answered my own questions with this analysis, but I’ll leave it here for critical opinions :-).


#11

Last exercise, modified variant 2) Stay with UBS, convert two Pillar 3a accounts to Vitainvest World 75 Fund and keep investing the maximum for 2 persons in fund backed Pillar 3a’s.

For sake of simplicity, I compared returns of UBS fund to Vanguard VWRL and in 1Y/2Y/MAX intervals Vanguard returned approximately double (33% vs 17% since inception of the UBS Fund in Nov 2015), therefore I will use expected return of 3% at UBS as compared to 6% at CT where I hold my ETFs.

  • Converting existing 24’000 CHF (not included in scenario 1 and 3 calculations, so I will only calculate the capital gain in this scenario) to UBS Vitainvest fund. Capital gain in 6 years 3’823 CHF, minus 4.5% tax on withdrawal = 3’650 CHF.

  • Investing 1128 CHF/month to Fund-backed Pillar 3a’s (two persons) for 6 years, return 3% per year. End of 2024 result 87’556 CHF, minus 4.5% tax on withdrawal = 83’615 CHF.

  • Investing 872 CHF/month at CT for 6 years, return 6% per year, End of 2024 result 72’990 CHF.

  • Tax saving approx. 800 CHF.

Total 160’255 CHF

Looks most cost effective, but of course carries a risk that the stock market will not behave as expected and my amortization goal will not be reached, locking me for years at more expensive mortgage rates for the full mortgage amount (80% apartment purchase price). Scenario 3) does not carry that risk.


#12

Could you liquidate this 3a now to pay off the mortgage partially? If so, this probably should also be taken into account with solutions 1) and 3). Lessens your interest payments.

OR could you start direct amortizations and transfer the 24k (liberated from asset pledge) to Viac?

There are no more fees with UBS? Their KIID mentions a possible 2.5% entrance fee. Doesn’t have to apply. No administration fees for having the honor of holding their funds? A simple 3a may be gratis while a 3a fund solution may incur fees outside of the TER. Have you been checking this?

Solution 2 might also bring the risk of having to pledge additional assets (e.g. when the value of the fund falls by 40% and does not cover the amortization rate any more).

I don’t know exactly what your situation is.


#13

No, not allowed to withdraw after only 3 years. Other than that, it may be advantageous for me to keep this money locked as long as feasible in 3a as this is not visible in my taxable capital. The “Tageschule” rates for my son are calculated based on salaries + 5% of taxable capital. It’s cheaper to not have this capital available.

What I paid in as of now corresponds to the contractual amortization I agreed for. If I transfer out without pledge, I may be short. Will have to clarify this.

Yes, no more fees if this is a part of 3a, “only” the TER.

I think as of now I’m pretty much set on solution 3) as this lowers the long time risks and makes more capital available for low cost investments after only 6 years, and is guaranteed.


#14

“only” the TER which is 1.72% on Vitainvest 75 World :wink:

I’m personally in the process of moving to VIAC because 1.72% is insane.

Source: Factsheet Vitainvest investment funds

Edit: Sorry, didn’t read the whole thread - you already knew the TER.


#15

Please tell us all about it when you are done. Are you going to convert your fund back to plain 3a and then to VIAC?


#16

Here is what I’ve done so far:
After setting up a VIAC account, you can get a transfer form at “Deposit” -> “Transfer”. It’s two pages to print, you fill the first (current bank and account number for existing third pillar) and send both pages to VIAC (Terzo Vorsorgestiftung to be more precise) and they seem to handle the rest.

I got a status update e-mail from VIAC today; they processed my transfer request and forwarded it to my previous bank, and they will keep at it and notify me when the process is completed. It will then automatically be invested into my selected strategy in the next rebalancing (happens monthly).

They have a FAQ on their website and you can find instructions there.

I assume (gut feeling, no other reason) it will take roughly 5 work days until the money is in my VIAC account.
I’ll keep you posted and you should hear from me soon. :slight_smile:


#17

@cray and @glina: thanks a lot guys for all detailed explanations. Same as I am currently wondering.

@glina: something still unclear for me. You want to amortize directly, willing to save a 1000/ year in interests correct?
At the same time the costs of amortization costs you 96000 CHF, hence 96 * 1000 CHF. I am sure I am missing something but right now I don’t see the point of direct amortization since by amortizing you are paying 96 years of interests (of course this can be fluctuating)??

Also you keep writing about 65%, but if the price of your flat goes up and you directly amortize then it could be much less in a couple of years putting you in an even better position to renegotiate. Any reason why you didn’t mention it?

I would really like to switch to VIAC 3a 100% equity but the way is that now I see the following issues. Please feel free to highlight where I am wrong (happy to be wrong actually)

-> indirect amortization seems much cheaper
-> indirect amortization is safer with a low equity 3a, since:

1- situation is not clear on what happens in case market crash. (anyone with more details?). What will the bank do and especially when?
2- banks seems to value it less than plain 3a.
Edit: @Mr.RTF I think I am making a confusion between pledging and Indirect Amortization. I actually mean IA with an 100% equity 3a not pledging. I am not considering pledging for downpayment.

Therefore the total that you need to amortize is very important. Which brings us to question 3:
3- general question. what happens in case Amount required for indirect Amortization> Amount put over 2 pillars (2*6768). Do you have to amortize the rest directly with cash?
4- Having a 3a pillar 100% equity at VIAC for indirect amortization would force me to take my mortgage there (technique to get clients). I called them and their rates are middle range. However it seems that VIAC prepares a special partnership with CS.

I checked on the internet, talked to some banks. Even to friends who buy, but did not get any clear answer.


#18

which account from VIAC will you choose?


#19

I picked Global 100 for now. Luckily I can re-balance for free later. (Which I’ll possibly do because I don’t actually have a solid strategy yet and need to sell individual stocks first etc.)


#20

This is not the goal, there is little to save on interest. I have to amortize the mortgage down to 65% of apartment value, everyone has. It’s just a matter of time. I set my goal to 6 years from now. Stock market returns cannot be used as reference on such a short term, which for my scenario means I either amortize to plain 3a or directly with cash. Calculation shows that amortizing directly will be cheaper.

You might wonder where did I get my 2000 CHF/month calculation basis from. Pretty simple. I have 24000 CHF in Plain 3a and 72000 CHF left to amortize in 6 years, so 1000 CHF/month. Two persons paying maximum contributions to Pillar 3a is 2x6768 CHF/year or 1128 CHF/month. Total 2128 CHF. I used 2000 CHF for ease of calculation.

I believe we should hope for the best, but plan for the worst. If the market collapses, the mortgage rates will increase and real estate values will decrease proportionally. I certainly wouldn’t want to find myself:

  1. Locked to one expensive mortgage provider
  2. Having to pay possibly very high interest rate on full 80% mortgage
  3. Falling apartment value and need for a large additional capital to secure my mortgage.
  4. Having to liquidate my stock market positions at poor value

Quick direct amortization will reduce my risk significantly without much added cost.