I’m about to sign a new rental contract and the real estate agency is asking for the usual three-month deposit, which for me is CHF 4,890. I saw that AXA offers a rental guarantee where they put up the deposit for you, and you pay 3.6% of the initial amount per year.
Do you think it’s a good idea to use that option and invest the money myself in VT or something similar, instead of leaving it in a 0% interest bank account for several years? I found some related discussions, but nothing recent.
Bad idea, way too expensive. You get margin loan for about less than a quarter that interest at Interactive Brokers.
Just for you to know,
Axa makes no deposit. Axa prints a paper sent to your landlord saying they’ll guarantee the amount in case they ask.
In that case Axa will pay. And immediately ask you to pay them back, plus fees (plus everything you paid already).
Scam.
To me this was obvious (that as tenant you don’t get away leaving a damaged flat with only a bit of interest payments).
I wouldn’t directly call it a “scam”, since if you e.g. move out of the flat 1 year later you’ll be sure there is no delay of getting the deposit back (not a problem with a good landlord; but a bad actor could block it and start claiming stuff which delays the release of the deposit).
Still, I’d never do it because of the fees (guaranteed loss).
Are you sure ? In their website it’s written they ask for 2.50% (with an IBKR regular account). And maybe this 2.50% is even compound, idk
Getting to this realization myself. When we came here in 2021 we didn’t have liquidity to fork out the ~7000CHF which was the rent deposit so took out rental guarantee, coming to about 400CHF/year. It’s dawned on me over time that this amount is most probably 100% free money for Helvetia…
I see, but I also feel it’s a scam to leave money losing their value in an almost 0% interest rate bank account. I was not talking about the idea per se, but about which path is rationally better.
With some mental accounting you can see the deposit as a 3.6% fixed income investment.
Not that bad, as you are sure you are “winning” (a.k.a. not losing) this 3.6% in CHF no matter the economic development (near 0 risk).
Well, some people won’t pay them back, or at least they will have to chase them for a while.
But, yes, probably not a bad business to be in.
I would have seen it as insurance with risk pooling, in which case, the tenant should be able to get away with only paying the premiums and potentially a deductible smaller than the full amount.
I’d be interested to see the actual terms of the policy. I wouldn’t be surprised if AXA (or another insurer) freed you from paying the premiums only once they’ve been liberated from paying the amount corresponding to the deposit. That is, delays in the liberation of the deposit would still be problematic.
I see your point. Still, this 3.6% is a simple interest rate, not compound. So, in the long term, it’s small compared to an investment.
It’s exactly that. And that makes it weirder. You are a customer paying the premium, you have a contract for an “insurance” (that isn’t) and that you don’t benefit, nor can you break the contract. It’s locked by the landlord (ok same with bank deposit).
It’s a risk assessment.
You can have stocks with all the risk but -3.6% returns on the initial sum (but not on the compounding of any potential additional gains).
Or cash with no risk and 0% returns.
The market seems to consider holding short term bonds from the Swiss confederacy worth a small negative interest (iShares Swiss Domestic Government Bond 0-3 ETF (CH) weighted average yield to maturity is -0.12% already. Shorter term similar instruments, akin to cash, would probably carry a more negative interest rate).
So 0% returns on CHF cash are returns above market value for similar instruments. We get a premium for the privilege of having access to 0% interest bearing bank accounts.
Buying stocks on leverage has lower returns, but as much risk, as what the market values the assets. AXA gives you an opportunity to invest and get below market value returns.
Unless I had a specific reason to want to absolutely maximize my returns by taking maximal risk, in which case I would already be carrying a margin loan to get me there, I would choose the qualitatively better option with the better risk adjusted returns, a.k.a. the bank deposit.
This is the same category as 3rd pillar + life insurance package,
That insurance companies love to hook unknowing fresh expats with.
Should be delegalized.
To me, 3rd pillar+life insurance is on a different level than rent guarantee deposit. The rent guarantee deposit is more transparent and less costly to get out if you decide to pay for the deposit yourself. Of course, it’s still a bad option with a small number of use cases.
What’s a regular account and where did you check? I’m pretty sure it’s 1.5% margin for the lowest tier.
That said, 4% (3.6% with discount if you go with their insurance?) is a lot, yet much better then some credit card debt.
Following @almi’s idea, and assuming you would have the 5k available, it triggers the more general and interesting question about expected and desired equity risk premiums.
Personally, I’d take a safe 4% “return” rather than a leveraged and risky return any time. But that includes that I have a lot of risk and leverage (at much lower rates), already.
Back to the specific case, it’s “only” some 5k, so I’d put them in the deposit account and be done with it.
Ibkr margin rates start at 1.5% + base rate (0.145%) an are tiered going down from that:
So it depends how high your margin loan is you will get a blended rate
If you have assets >1M you can contact IBKR for lower rates btw.
Does that also apply if you’re only asking for a 5k loan?
Yes, but I wouldn’t negotiate the interest rate if the loan were only for 5k…
