Mortgage renewal / mortagage increase

Hi everyone,

I’m not sure how to categorize this topic. I’m going for real estate, but it could be taxes or even inventing. So please let me know if i should change the category.

End of this year my 2nd rang mortgage will reach its end date so I need to renew it. I have pretty much discarded to pay it out, as it’s very expensive tax wise, and would require to use my 2nd pillar (but please change my mind).

When i bought my apartment i did not use my 2nd pillar and I had around 30% for the down-payment. So I’m in a pretty good position to increase my mortgage. I can increase my mortgage and use my existing “cédulle hypothécaire”.

I ran some numbers and I came up with a plan. I would appreciate your inputs to improve it or identify any flaw.

My plan can be summarized as:

  • Increase mortgage, and get around 100K in cash from the bank
  • my mortgage payments will increase 100CHF per month, or about 1200CHF per year. this is after discounting taxes, using 40% marginal tax rate. This is something that i can pay.
  • With the 100K I can
    A) buy shares (VOO, VT, etc). In 10 years take that money and pay back the mortgage.
    B) buy 2nd pillar. I’m leaning towards this option (again, please change my mind). This is my preferred option.

Option (B) is more elaborated. I’m thinking to, buying 2nd pillar in 2 fiscal years (2021 and 2022). That will allow me to pay very low taxes and free all that cash to … you probably guessed it → buy shares! Then in around 10 years I could sell the shares and pay back the mortgage. According to my calculations, with 7% growth i should be able to pay back the 100K and a bit more. And i will have 100K at 2% in my 2nd pillar. Another option is to use my 2nd pillar to pay back the mortgage. However I prefer to sell the shares, as in 10 years I could actually repeat the whole thing.

Risks management:

  • real state market crash, if this happens and the bank ask to get their money back (basically if my apartment is worth less than the loan) i could take the money from my 2nd pillar or from my shares. Probably i would take it from my 2nd pillar as the shares could tank at the same time, like in 2008.
  • interest rates increase, I should be covered from the mortgage point of view, as I’m planning to go for a fixed rate. the shares will suffer , but the 2nd pillar should yield more than 2%. So I think that I’m still covered.
  • stock crash, in this case I won’t be able to pay back the loan with my shares, but I’m covered by the 2nd pillar.

There are other options to use the money, like buying a 2nd apartment for rental income. But that would would expose me too much to a real state market crash as I higher portion of my net worth will be tied to real state price. And I would pay even more taxes and mortgage. Which will significantly reduce my net profit.

Has anybody gone through this analysis? I would appreciate your inputs.

tits_up
… Right? :thinking:

Cherry on the cake
I don’t know if this is possible, but i will ask to the bank. I’m thinking to use my 3rd pillar to payback the mortgage and ask the bank for the same amount. So the money goes out of my 3rd pillar, the debt is the same (plus the increase that I’m requesting) and I get the money from my 3rd pillar as cash, which I can put on my 2nd pillar and make the whole thing more interesting. Between me and my wife we max out ours 3rd pillar every year. that around 14K per year, in 5 years it’s 70K plus any appreciation (hello :wave: VIAC), at 40% marginal tax rate that’s 28K in tax that could go to investing.

Why to buy 2nd pillar on two fiscal years?
I did a simulation with VaudTax and it’s better to split the money in 2 2nd pillar purchases, this maximizes the tax savings for 100K and my personal situation. Basically whatever amount of money that you put in your 2nd pillar will not push your tax to zero or negative, so you need to find the sweet spot.

Why not option (A), just buy shares
Well, this option does not have the tax savings part. The stock market returns should be higher than mortgage interest so in theory it’s interesting, but it’s more riskier. The interesting part with option (b) is that has less risk and higher return.

As I said at the beginning, not sure how to categorize this topic. I’m looking at this mainly from the tax saving point of view and how to use the tax savings to maximize profit.

I would really appreciate your inputs. Specially if there is any flaw that I’m missing.

Cheers!

Unless you have a 30y+ time horizon that’s not really how the stock market works, variance is huge. E.g. it could be well below average for a decade.

That sentence is wrong. I hope you didn’t mean what you wrote.

Hi,

yes, that’s what I meant. I probably should have included an example. In a real state market crash the value of real state would go down. For example 1’000’000CHF house, 80% mortgage, 30% market value decrease, at that point the bank will have a loan that is backed by a property that worth less than the loan. In that case I think I should be covered, as I can use my 2nd pillar to pay back most of the loan. It will be painful, but i will have a place to sleep.

Ok, you made it sounds like you don’t pay anything as long as the value stays above 800’000 (80%).
At least that’s what I got from that sentence.

Hi,

I do hope to be FIREd in 30 years :slight_smile: .

I understand what you mean, there is volatility in the stock market and no certainty that i can recover the capital. However with 10 year, or even 5 years time horizon most of the time you should recover the capital and get a positive return. Below are some graph that illustrate this. I find interesting that all come with different numbers, probably due to differences in the portfolio. In 10 years there between a 6% and 1.4% chance to have a negative return over 10 years. That’s within my risk tolerance, specially knowing that what I’m investing are my tax savings, while the mortgage increase is in my 2nd pillar.

Long_Term_Stock_Return_Variability

Cheers!

Are those real returns (ie. inflation adjusted)? (it might make quite a difference).

Personally I don’t think this part is a sound idea (with all disclaimers about informing yourself and not trusting me)

  1. Using your 3a to payback your mortgage is fine, but not if in parallel or shortly thereafter or before increasing your mortgage. This basically is “working around” the rules of the 3a. There are some federal court decisions on this - basically it’s “not serving the purpose of pension” (you are just converting 3a to free assets via a trick) and the payout will be added to your regular income instead of a separately taxed 3a income, which destroys all your past deductions.

  2. Moving 3a into 2nd Pillar is a legitimate 3a transfer reason, no need to go via free assets first. But it will not count as a withdrawal and won’t get taxed. So when you withdraw your 2nd Pillar later you will just be in a higher bracket.

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I’m not 100% sure about what I’m about to say:
The 2nd Pillar can also have variations in its value, especially in a crash. If they are below 100% “Deckungsgrad” you will not get 100% out.

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Interesting topic!

Forgive my ignorance, just to clarify:

How does this will work exactly? I understand that after some (15?) years you need to get your LTV to 66%. Does that mean that you are currently below that and after you get the CHF 100k you will still be at 66%? or the bank is somehow resetting this and allowing you to go again to 80%.

Also the bank would give you a free pass on the use of loan proceeds? I.e. should not be linked to home improvement etc?

Last, you could also amortise indirectly through your 3rd pillar and invest that (depending if your bank’s fund make any sense) and thus further increase your investment exposure if you wish so :slight_smile:

Thanks, this is really useful.

I have already started discussions with my bank, and i have to clarify this point. I’m struggling to find information on what you can and can’t do. if you can point me to any resources I would appreciate it.

I didn’t know about point (2) that you mention. But unless I’m missing anything, i don’t find interesting to just move money from 3rd to 2nd pillar for the sake of it. The opposite would be quite interesting though, specially with VIAC.

I did an analysis based on how much tax needs to be paid when you take money out of the 3rd pillar. And I found that the best tax wise is to take the money every 5-10 years. Otherwise you have too much money in the 3rd pillar and you pay more taxes at withdrawal. Is basically the same concept that the staggered withdrawal strategy (Why a staggered withdrawal for the pillar 3a? – VIAC).

But in a low interest rate environment, and with the swiss tax scheme. it’s not interesting to decrease my debt. So I thought about this option of using the 3rd pillar money but at the same time keep the same level or more of debt. Which from what you are saying it might not be an option at all.

Hi,

Thanks for this. it’s a really good point. I will need to talk again with my pension fund to clarify who things would work in case they are bellow 100% coverage. In the case of a real state crash this could be a bottle neck.

As Warren says, “It’s only when the tide goes out that you learn who has been swimming naked”. And pension funds are over exposed to real state in Switzerland.

Hi,

Yes that’s correct. but that’s not my case, I still have time. At the moment I have a cédule hipothecaire that’s worth more than my mortgage. So I asked the bank if the can increase my mortgage, I’m still waiting for an official confirmation, but after the initial discussions this is possible and it’s done on a regular basis.

You can increase your cedule hipothecaire as well, but then you need to go through the notary and increase your fiscal estimation, which means more tax and notary fees. So I will push that as much as possible into the future, and only go for it if I really need it.

This is the most incredible thing. I asked specifically about it, and they told me that in my case, I will get the cash. when i bought my apartment, i never saw the cash. it went from the bank to the notary, and the bank of the seller.

Yes, I know about this option. but this not interesting for me. I’m already maxing my 3rd pillar. That’s why I’m looking to put all this on my 2nd pillar, there is no maximum on how much money you put there. Providing that you can justify where the money is coming from.

I meant that going forwards, for the CHF 100 per month you mentioned as amortisation. Maxing out your 3rd pillar (or even at least the CHF 1,200 p.a.) satisfies your amortisation requirement and since you are already paying your 3rd pillar may make sense. But it has to be with a 3rd pillar with your bank (not VIAC)…

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