A mortgage has a monetary advantage: you can use the money in the stock market instead which can have higher return than the mortgage interest rate.
But imagine for piece of mind one wants to spend the money to fully pay off a mortgage anyway:
Are there any possible non-monetary benefits that get lost?
I feel like having the bank be there as an interested party in your property can have advantages, e.g. preventing property fraud (like this: Man's home 'stolen' in conveyancing fraud - HPLP Solicitors), providing the bank accounts for Mietkaution and rent payments in case it’s a rented out property while already knowing about the property, …
What’s it like to go mortgage-free, any other unforeseen disadvantages of doing that?
My parents paid off their mortgage completely. It is nice, that no payments - beside the maintenance costs or the funding of the renovation fund - are due. The property is 100% yours.
Yes, the taxes are a bit higher, but the overall costs are lower (depends obviously also on the stock market, if you invest the mortgage equivalent).
I really don’t get this: yes, taxes go up a bit, but mortgage interests are gone and those weigh more than the taxes (plus are paid to the bank instead of the state/kanton/town). Or am I wrong? Only real drawback IMHO is the opportunity cost of having so much (especially in CH) tied up in a single thing.
To answer the OP, an advantage IMO is to be able to quickly increase the mortgage in case one needs some cash.
Some people get a peace of mind out of this. If one is very security oriented, they should consider it.
No more amortisation worries, no more worrying about refinancing.
OTOH:
If you don’t have much in the for of any other savings, all your money will be in your house and you’ll be tied to it.
Personally, in Switzerland, I’d always keep the mortgage at the highest affordable CHF value and use it in the stock market.
In other jurisdictions where property registers are more open to the public, keeping a token interest-only mortgage (four, five digits) may confer advantages when people look for victims to take advantage of (lawsuits, burglary/theft, etc) - you appear poorer than you are.
Some interesting ideas in here, but they seem a bit far-fetched.
With low interests and high enough income and wealth tax, the mortgage costs next to nothing. For example, an already low 1.5% could become 0.5% net or less.
It’s quite easy to get a higher return elsewhere, even without high risks in the stock market, e.g. in your pension fund (plus even more tax deductions if you buy-in).
Less affluent home owners might also worry about liquidity in old age. For them, paying back the mortgage isn’t peace of mind, it’s a worry to run out of money. So, they rather pass on part of the mortgage along with the property.
The financial industry uses both arguments, I assume, as they are quite happy with people not repaying.
Taking out or paying back a mortgage doesn’t affect your wealth taxes as your net worth will not change (and the tax value of the property typically being lower than the market value is also independent of the mortgage).
So the mortgage interest payment gets discounted by your marginal income tax rate but nothing else, as far as I can tell. That might be 1.0% net instead of 1.5%. 0.5% net instead of 1.5% seems unrealistic or even impossible in Switzerland.
(On the other hand, you might no longer get the full DA-1 tax credit).
Fair enough, not necessarily. I had two specific cases in mind
mainly buy-in to pension fund, but for some also
spend available money
instead of reducing the mortgage.
Similar, increasing mortgage for renovations would lower your taxable wealth, but not necessarily the taxable value.
That 0.5% example included an arbitrary, yet moderate 30% income tax rate and 0.5% wealth tax. Income tax rate alone doesn’t go higher than 45% to my knowledge.
Either way, it’s just an example to illustrate that taxes do affect opportunity costs and are one reason why I for example don’t amortize, even though I could.
This is important for me, as explained in a previous post:
“when my heirs need to split my belongings, the mortgaged real estate will be a fraction the total wealth that can be attributed to a single heir. In contrast, a fully-amortized real estate object would be a larger fraction of total wealth, probably large enough that it cannot be given to a single heir; I see this as a complexity and possible risks of conflicts”
And what happens, if you die couple of weeks after taking the mortgage? Then your girlfriend/wife is stuck with a mortgage.
Does the set up matter? If it is unleveraged, take a mortgage and pay off your brothers and sisters. If there is a mortgage, one can do the same split? In my eyes, it will be more complicated with a mortgage.
Well, I’m mostly thinking of my surviving spouse, who is co-owner of our home and would be the intended heir for my half.
Taking a mortgage (in order to pay their share of the estate to children) may not be easy as a retired widow(er)… It is easier if the mortgaged home goes to the spouse, and liquid investments are used to give their part to children. Of course the mortgage must be low enough to be bearable by a single retired person.
I know well that other options exist to protect the surviving spouse and avoid being forced to sell the home, but we discussed and agreed that this method suits both of us for our situation.
That’s quite monetary Either way, financial security should be taken into account before buying.
I don’t think it’s any difference between a paid-down mortgage or mortgage plus other assets. Buy-ins to pension fund or your stock portfolio would also be part of the bequest and can be either kept or used to pay down the debt.
On top, the family is covered by each other’s widow and orphan rents.
For me, it’s too far out. I guess we would start the discussion about the house in due time. Maybe none of the kids will be interested, anyway and they’d just sell it.
Otherwise, still plenty of time to structure who gets what.
You’ve hedged out a big living cost that typically rises with inflation
You don’t need to worry about making money to pay interest
You don’t need to worry about interest rates going up
You don’t need to deal with mortgage renewals
You reduce the gross cash flows you need to manage
You eliminate the need to have enough cash to make each quarterly payment. This lumpiness in outgoings means you have to deal with having the extra cash available by moving it to your account or having a larger float to deal with it
There are psychological arguments that matter more than the financial ones. For many being debt-free is a matter of principle. The right choice obviously depends on many factors. For me, the reasoning is as follows.
I don’t want debt because it gives more control over my situation (e.g. what if the regulations change and the bank decides not to refinance my mortgage)?
I’m not (explicitly) financing my investments through the mortgage, I think it’s dangerous. While the financial leverage is nice when things go well, it can get ugly when the stock market is bad.
I will pay back my mortgage from pillar 2 in the (fiscal) year before I cash in pillar 2: this will allow me to to reduce my capital tax (I’m in Zurich where progression is very steep), while not incurring in the downsides of financing property from pillar 2 (having to pay back the capital before being able to do a new buy in, don’t care as I will retire the year after).
Although not invested, the mortgage-free property is a valuable emergency fund I can tap into if things go bad. I can decide to rent it out or sell it.
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