We are going to buy my wife’s parents’ house in the canton of St. Gallen in 2025 and need a mortgage for it.
We have liquid equity of around 50% of the purchase price (first estimate at the beginning of last year, new estimate will be made shortly before the purchase in mid-2025). I don’t include emergency savings of 6 monthly income and an investment portfolio of around 30k which I don’t want to touch.
What I’m thinking about is whether we should both make a WEF advance withdrawal from our 2a and 3a, which would increase our liquid equity to around 60%. We are both in our late 30s and our affordability is at 22%.
What do I have to consider to calculate whether it’s worth it?
performance of 2nd pillar, pillar 3a and other assets
future plans/affordability by retirement
your gut feeling
Assuming you have a marginal tax rate of 35%, an mortgage interest rate of 2% has an adjusted value of 1.4%. So effectively after tax, you are paying 1.3% of interest, since you can deduct the interest from your taxable income.
If you are confident, that you can beat 1.3% p.a. in the market/with your 2nd pillar/pillar 3a, then - from the financial point of view - it does not make sense to use more equity than needed by the bank. In fact, it makes sense to leverage, if your income situation allows that.
Since people act irrationally, I can also understand if someone is investing more money just to reduce the debt and therefore invest more own equity.
Therefore: it really depends on your personal preference, there is no right or wrong. But there is an ideal and “could be more ideal”
I guess if you take out money from the 2nd pillar you won’t get tax relief until you have put them back. Late 30s means you are probably working towards peak income and thus tax burden, so I’d personally use the moment to buy more into the 2nd pillar, if possible, rather than withdrawing.
Mostly I’d worry whether the house is in a good location and for a good price.
Adding to Giff’s comment, one possibility is to withdraw one of your 2nd pillars but to keep the other one untouched. That way, you can still do buy-backs in the 2nd pillar and get the tax deduction without having to first pay your withdrawals back.
In that situation, it would be best to not touch the 2nd pillar with the bigger buy-backs potential (generally the one from the higher paid partner).
Just to subscribe to what xerox5003 said, important is always to compare the interest rate of the future mortgage with the returns you can make of your capital, knowing that, the mortgage interest rate is “risk free”, but the potential returns elsewhere often are not. Still, currently mortgage interest rates go around 1.7% to 2.5%, US stock market averages ca. 10% nominal, but real after usd/chf depreciation is much lower, and Swiss index SMI has been approx. 4.8% in last 5 years, and 3.6% last 10…
50% vs. 60% equity won’t make a difference in the rates you receive. Just make to sure to gert several offers.
I took out my pillar 3 and will continue to do so every 5 years or so. If your 3a is in cash, definetely take it out. If it’s invested, it’s up to your risk preference.
Instead of withdrawing the 2nd pillar, I buy-in year by year. The tax deductions alone beat the mortgage interest for years to come. You can still go for the advance withdrawal after the minimum 3 year waiting period.
That‘s why my mortgage to value ratio was 91% when we bought our apartment (pledged 2nd/3rd pillar). We are also doing indirect amortization with 3rd pillar accounts (100% invested in a passive 3rd pillar fund) and don‘t plan on ever reducing the mortgage.
do you have to payback the 2nd pillar that is pledged to get the tax rebate?
I have just bought an apartment off plan in the Lausanne area and now am looking to find the best way to structure the mortgage. I can chose to pay the 20% down payment or pledge my 2nd/3rd pillar for the 10%.
How could I run some simulations to find out what will be a better financial decision. I am around 40% marginal tax (married without kids) if it helps to make a decision.
Just compare your mortgage interest after tax with the interest paid by your pension fund.
If pillar 3 is invested it depends on your expected return and risk tolerance.
understood
and the assumption here is that the 10% that was not used for down payment can be invested to generate a better return than the mortgage interest rate (about 2% currently)
but pledging 2nd pillar would not stop getting interest on that account?
I am not sure how the pension interest rate and the mortgage interest rates are corelated?
I’m not sure if I get your questions rights. Pensions fund have a high percentage of fixed interest instruments, amongst other asset classes, so there is some correlation.
I don’t think it needs a complex simulation. You can compare the numbers directly, and if anything changes you can still withdraw the pension fund.
2% mortgage is 1.2% after tax with your 40% marginal rate. If your pension fund yields 2.5% (which applies also to pledged amounts) it makes sense to pledge 10%. The higher mortgage is compensated by the higher return.
Also, you skip the withdrawal tax for now and keep the option to buy-in.
As mentioned, expected returns on an invested pillar 3 should be higher, but also riskier.
the question was whether to use 20% of cash to do the down payment for the apartment or do 10% cash and then pledge for the rest 10%.
I never thought about withdrawing the 2nd or 3rd pillars.
If the pension fund pays only 1% interest even then I don’t think it makes sense to withdraw because then there is no way to deduct 2nd pillar from the taxable income and any possible extra contributions are blocked till that withdrawn amount is paid back.
Essentially the question is between 20% vs 10% cash downpayment with a view to optimize tax and secondly to do a better allocation of capital with a view to higher long term gains.
Got it.
Either way, 10% downpayment is the way to go.
Long term (10 years plus) putting these 10% in stocks is likely to provide the highest return. For me, I’d would be too risky.
I personally would prefer to buy into pillar 2 with these 10%. Guaranteed “return” thanks to the tax savings and quite safe returns at or above the mortgage rate.
Which one to pick depends on many factors not mentioned, like other assets, income, asset allocation etc… Maybe start with a simple spreadsheet? Not a fancy simulation, just comparing
a) 20% downpayment (whatever the CHF number is)
b) 10% down + 10% ETF investment at 3, 5, or 7% average return - mortgage interest on the additional 10%
c) 10% down + pillar 2 buy-in with tax savings and 1 or 2% average return - mortgage interest on the additional 10%
over 3, 5, 10, 20 years?
I think a related topic for a decision is the ability to do a so called “cash-out refinance”. Because in that case one maintains the option to, at a later point in time, move some capital back from the house equity onto stock market or other investments. Does anyone know if this is possible in Switzerland and conditions?
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