Mortgage and Investing

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1

Dear forum. My wife and I are in our mid-30s, have 2 children and work a total of 140% as a lawyer and business economist respectively.
I would like to share our finances and a few questions with you and am looking forward to your feedback.

Liabilities:
Mortgage 1.1 million
House with a cost price (purchase plus renovations) of around 1.6 million, market value estimated at 1.8 million based on a recently sold identical house in the neighbourhood.
Indirect amortisation via the 3rd pillar
Remaining term of the mortgage around 5 years.

Assets:
Cash: 80,000 (of which 40,000 at Bank WIR with a current interest rate of 1.80%, which I regard as a ‘semi-liquid fixed deposit’)
Shares: 150,000 (around 100,000 VWRL, 35,000 SPICHA, 8,000 ZURN, 3,000 LGN, 2,800 BNTX, 580 CALN for the pyjamas :slight_smile: ).
Coins: 1 ETH
Pillar 3a: 56,000, with UBS Vitainvest 100% in equities (passive). We have to leave the 3rd pillar with UBS due to the indirect amortisation.
Pension fund: around 120,000; we withdrew around 85,000 for the house purchase, which we would have to pay in first if we want to make tax-privileged purchases.

Income: around 185,000 per year for the 140% job percentage.

Questions:
We are planning to reduce the mortgage from the current 1.1 million to 0.8 or 0.9 million in around 5 years. I would like to leave it at this level so that the loan-to-value ratio is around 50% and also to make it easier to fulfil the affordability criteria. It would give us the flexibility to take on lower-paid jobs with lower salaries that might be more enjoyable. Against this background, how do you assess our asset allocation? Does it make sense to reduce the proportion of equities today?
Or would you leave the mortgage at 1.1 million or even increase it to 65% of the market value, provided it is affordable?

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Dividends alone are enough to pay the interest of the mortgage. I see no benefit in reducing the mortgsge.

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3

It depends entirely what your goal is. For example if your no 1 goal is to be FI in (say) 15 or 20 years time it is highly probable you’ll be better off with more equities.

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Using online calculators, it seems that you’re stretched thin with your mortgage. Financial decisions are personal but I would agree to lowering it.

Seing as you are relying on the dual income for affordability, I would verify that your family is sufficiently covered in terms of insurance and that plans are made in case of disability or death of one or both of the partners.

Regarding pension funds, I’m guessing only one of you is insured? If you are both, then you can repay only in one of them, then you’d be able to make additional buy-ins to get tax benefits in that particular fund. A standard scenario is to have one of the pension funds used for the house and one kept untouched for potential buy-ins.

Regarding the pillar 3a, as part of the reevaluation of the amount of mortgage you want to carry, if it is an option, I would consider dropping the indirect amortization and freeing the 3a to use in another solution (VIAC, Finpension, Frankly or other).

Regarding asset allocation, in my opinion, cash should be checked in regards to your expenses / the provisions you want to maintain. As for the stocks level, it’s once again a personal assessment. With roughly 200k in stocks, I wouldn’t say that you are overinvested in them but that’s assuming good insurance coverage (especially if you are an independent lawyer with the risk of no income at all in case of work incapacity).

Taking a hollistic approach (considering the mortgage as leverage for your whole assets), your current allocation seems to look like:

81.6% own real estate
9.34% equities
5.44% bond equivalent (pension funds)
3.63% cash

with roughly 2x leverage applied on it.

Or 50/30/20 stocks/bond-like/cash if we exclude the real estate.

My main concern would be the share of the real estate and the size of the mortgage vs the other assets. Past that I’d deem it a matter of sleeping well at night and keeping an allocation that allows both partners to feel good about your finances.

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We have a similar situation. Mid 30ies, one kid, combined gross income of about 235k (205k excluding bonus) at 160% employment.

We owe 1.0M on our home, whilst having 600k equity in it (purchase+renovation = 1.6M). Mortgage payments only, no amortization. We have around 30k in ETF’s, 40k cash, 225k in 2nd pillar and 78k in 3rd pillar.

ETF portfolio is now starting to grow again, after liquidating all liquid investments for the home purchase, we are at 62% asset allocation in real estate. Given Swiss property prices, there’s just no way in hell not to be massively overallocated in real estate, if you own something in a desirable location. I could have probably taken a slightly higher mortgage, but it feels right not to have an amortization requirement

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That‘s an similar situation like i have. I think i‘m ready to buy something mid next year. I‘m scared that the stock will go down because i need to liquidate also everything. Did you liquidate in advance because you knew you will buy something or did you do it when you found something?

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The money you need next year should not be in stocks. It should be in assets with low volatility

Money in stocks should be what you do not need for at least 5 years, ideally 10 years.

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Was it all worth it, how do you feel about it now?

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The main problem is that all the money tied up in Real estate is actually not liquid at all. It also doesn’t generate any income per say but of course you don’t need to pay rent, so it’s fine.

So question about reducing the debt is not about asset allocation , it’s about if you feel comfortable with debt itself.

If you don’t care that you have 1.1 MM debt and your income streams in future can cover the mortgage costs and also manage the fluctuations of interest rates, then I don’t see real need to reduce the debt. Perhaps try to run a scenario that if mortgage rates goes up by 2-3% over next years, you will still be fine with it?

However if you are someone who would not like to carry debts, then it makes sense to slowly reduce it. Although I don’t really see this going down to zero anytime soon anyways.

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we knew about the option to buy the house about three years prior to actually paying for it. I obviously stopped investing any new savings immediately and liquidated most of my ETF and crypto portfolio in spring 2024. That was good-ish timing for once (missed out on some of the new ATH’s in summer, but what can you do
). But that was “only” about 150k, the rest was already in savings accounts and a good chunk was an early inheritance.

edit: also, we did not touch 2nd or 3rd pillar, although it would have been option to use for equity, instead of our ETF portfolio. I see it as a reserve buffer in case the home value would tank or if some additional unplanned repairs would come up.

we don’t live there yet, renovations are just about to start and will take six months, so will come back to this in maybe a year. Financially it would have probably been smarter to continue to rent in Zug but having a single family home was always kind of a life goal of mine.

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Everybody is different, but frankly, $1.1m of debt against liquid assets of 230k would make me uneasy.

My thoughts:

  • My immediate gut reaction is to reduce the mortgage to something more manageable. However, you’d still have large debts and even fewer liquid assets
  • Then I think, OK, let’s just invest them into stocks then. But then I’m too worried about the high level of the stock market (Is it obvious that I’m a worrier?)
  • So then I would also consider paying into the pension fund. This doesn’t carry risk of the stock market crash, but can still be used to pay off mortgage. But depending on your PF, returns may be low.

How much disposable income do you have each year? If fairly sizeable, I’d probably look to paying into pension fund now for the mortgage reduction in 5 years time (I guess you can only contribute 2 years without tax penalty) and building up liquid assets (investments in stocks/bonds etc.). Assuming you save 60k per year, you only get a little benefit over 5 years. Maybe if you stretch it to 6 years it is more worthwhile.

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12

Great advice, thanks!

We plan to do that in 5 years time, as we are currently obliged to have it with UBS due to the mortgage with indirect amortization.

We don’t have any large expenses coming up. I was just rather hesitant to buy more stocks due to our tight affordability and our plan to repay some of our mortgage in 5 years. And I found the 1.8% interest on the WIR account appealing in terms of risk-return. Or would you consider other investments such as bonds?

Fair point! I got an offer from mobiliar which we should either sign or get some counter offers


I didn’t include the own RE in our asset allocation in my thougts, since we plan to never ever sell :wink:

While the RE allocation doesn’t bother me, the mortgage sometimes does due to the tight affordability. I therefore plan to reduce the mortgage to c. 900k for which the affordability would be in the green.

Haha, yes! Totally true.

That’s another rationale to bring our mortgage down to 900k, although with a reevaluation in 5 years and including the gains we had during the las 5 years, a higher mortgage is probably possible.

If you plan to buy soon, I would consider keeping it cash / cash equivalent and liquid. You need to be able to move fast if the right opportunity arises. Furthermore, if stock markets go south you would not be able to buy a house.

That’s why I consider it a liability rather than an asset (if you don’t plan to sell of course). And yes, there’s no rent but there’s interest and maintenance.

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Yes, it does. We used most of our assets for the purchase and refurbishment. We save c. 40k per year, so that would give us another 200k in 5 years time when we need to renew our mortgage.
Our mortgage is fixed term, so there’s no interest risk until we need to renew.

So would you consider to reduce the stock allocation and use the money for buy ins? Or rather not grow the stock portfolio further?

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I think my conclusion is “just because you can, does not mean you should”, especially when it comes to using leverage and debt.

And yes, given RE prices have been rising historically, you might end up getting to over 33% equity just by waiting for a higher valuation in a couple years. I would re-evaluate in a couple years time and now continue to build up a (semi) liquid buffer.

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I agree, my sweet spot is around 900k of debt.

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I wouldn’t reduce, but I’d try to build up safer buffers:

  • More cash/emergency fund
  • Pension
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That’s what I’m doing, and I have an even higher stock allocation and mortgage than @IL-BOSCO. Or rather, I do both: Put my savings into both more stocks and pension fund buy-ins, in line with my target asset allocation, without reducing either.

Even before tax deduction, our pension funds returns are slightly higher than interest paid. Including tax deductions, you have nice, relatively safe return even over longer time periods.
Maybe it helps to decide on your asset allocation in a no-house, no-mortgage scenario first, and then add them back to compare your options.

If the parameters change (returns and interest, your income, tax rate etc.), you still have flexibility to withdraw against the mortgage, or pledge against a new one. Or move it to a higher risk allocation in a vested benefit account when leaving the pension scheme.

When reading about the general wisdom of financial advisors, or many recommendations in this forum, voluntary buy-ins feel like an underappreciated option, at least for somebody in your situation.

Regarding affordability, are you concerned about risk and cash-flow in general, or rather the bank’s calculation? If you stick with your current provider, I’m not sure whether they’ll check it again.
Otherwise, you might be able to log-in your next rate in advance and before reducing your income.

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18

What would be some recommendations on this?
I am in the similar position, considering to buy a RE within next 2-3 years, currently have savings sitting on a simple saving account.

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Actually the first thing you need to be sure of is that you would actually buy RE. Because if you don’t end up buying for next 5/10 years then you simply lost chance to grow the capital

Let’s assume you will buy RE in next 2-3 years, so the low volatility options could be

  • fixed deposits in banks
  • Medium term notes (Cembra has decent rates for 2-3 year period) and check for other banks
  • Government or high credit rating CHF denominated bonds with maturity in 2-3 years time frame.
  • I guess money market funds can also work

I don’t actually know of anything else.

P.S -: bond ETFs can suffer drawdown in case interest rates go up , that’s why I specifically mentioned Bonds.

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One question about this. Other than the “you have to wait N years after a voluntary buy in before being able to withdraw”, are there any restrictions on withdrawing cash to pay off your mortgage?

Specifically I am thinking about the following hypothetical situation:

  • While working with a high marginal tax rate, and assuming a low interest rate, it likely makes sense to pay off as little mortgage as possible but rather do voluntary buy-ins to the pillar 2.
  • Suppose now after some years of lots of buy-ins one has 2M in pillar2, and 1M left on the mortgage(random numbers where it’s enough to pay off the mortgage and still have enough left to get a good annuity)

Now a couple of situations that might arise:

  • You lose your job. You will get a job in some months, but you might not be able to make all the mortgage payments until then. Is it possible to make a partial withdrawal to cover the mortgage payments in the meantime?
  • Or interest rates rise to 10%. Suddenly it would be much better to have 1M in pillar 2 and no mortgage. Can you withdraw 1M and pay off the whole mortgage?

I am quite naive about mortgages. So maybe the answer to these questions is also dependent on the precise conditions of the mortgage, rather than the rules around capital withdrawals?

Context is that I am trying to understand exactly how to evaluate the advantages and disadvantages of doing voluntary buy ins vs paying off more of a mortgage.