Mortgage: amortization and pledging

Hi everyone!

2 quick questions after reading the topics in this forum:

  • amortization: after reading @Cortana ’s comments, I think the best is the indirect. Anyone disagrees?
  • pledging: I think the best would be to pledge the 2nd and 3rd pillar (in this order, first the 2nd) to reduce de downpayment. Paying less than the 20% required, would allow us to keep more money invested, which should return more money than what we pay in interests. What do you think about this?

Thank you!

The key criteria with pledging is: do I earn more than the mortgage interest rate if I stay invested? If your third pillar is invested in ETFs, then clearly, the answer is yes (1% interest vs. 7+% growth). But for the second pillar, it’s not so clear. Mine earns 1% but maybe yours is better.

Remember that if you pledge an asset, you’re required to amortize the amount, at least that’s what the Money Park guy told me. So let’s say you put 10% in cash and 10% is pledged assets, you get a 90% mortgage that you’re expected to amortize until you reach 35% equity. And I think that the 15 years apply here too. So if you pledge your second pillar, you have to “pay it back” whereas if you withdraw it, you are free to leave a hole in your pension.

If I had to take a mortgage today, I would pledge my third pillar but withdraw my second.

Thank you for you answer @triviamaster

I do agree with the 3a.

About the second: if it returns 1% and interest rates are 1%. It doesn’t matter if you pledge it or withdraw it. It shouldn’t be a big difference. However, if it’s pledged you keep the insurance for disability or death, isn’t it?

For 2nd and 3rd pillar, hopefully the amortization could be paid if the house is reevaluated after 15 years and the value has increased, isn’t it? If not, the amortization could be paid with them, but at least the 2nd and 3rd pillars have been useful the previous 15 years.

Am I missing something?

Alternatively: indirect amortization in a fund from your bank (high fees but still a better yield vs a traditional 3a bank account), so that you can invest in a mustachian 3a like Viac or Finpension.

Is it possible to pledge the existing 3a and do the indirect amortization with the 3a too?

Yes it is possible @lorenzogm

That depends on your provider. Some funds make the disability insurance a function of the amount saved, and others don’t. For mine, it doesn’t change anything.

I’m no expert but I don’t think this is how it works. You have 15 years to bring your equity to 35%. So when you sign the mortgage, the payments are set so that you fulfill this condition. Whether the property is reevaluated after 15 years doesn’t play a role. Well, what could happen is: you bring your equity to 35% in 15 years, then the house is reevaluated (let’s say the value increased 30%), and then you can get a “reverse mortgage” from the bank, given that you now own 50% equity based on the new value. So the bank could lend you 15% of the value of the house at the same rate as the mortgage.

Withdrawing the second pillar is, in my opinion, superior to pledging because the amortization is less steep. Another point to consider is taxes: pledging is not a tax event whereas withdrawing is. The thing is: since the tax rates are progressive, it’s better to withdraw 2 smaller amounts (one when you buy the property and one when you retire) rather than 1 big one (i.e. to withdraw only when you retire).

One important aspect to consider when pledging 2nd vs 3rd is that 2nd pillar does not count as equity while 3rd pillar does. Pledging the 2nd only gives you better interest conditions nothing more, you will still be required to pay back the pledged 2nd pillar amount if you are below the 35% equity threshold, while what is pledged through the 3rd pillar is not required to be amortized.

Of course if you withdraw from the 2nd pillar and put that money into the property this becomes equity, but keep in mind that a downpayment corresponding to 10% of the property value must come from sources other than your 2nd pillar.

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