The smarter choice: Mietkautionsinsurance (rental guarantee) or Mietkautionsdepot (security deposit)?

I am in the process of moving from one rental property to another. All my life I’ve been putting cash into an account at a bank for the security deposit. It’s never really bothered me that my money was locked into an account at a bank for several years. But then again I’ve only recently came across the FIRE movement and started becoming more interested in investing.
I’ve been living in my current for 5 years, and in those 5 years my 4’000 CHF deposit accrued ~1 CHF in interest. Or in other words, in real terms I’ve lost money to inflation over the past years.

In preparation to my move in February, I came across the option of using rental guarantee insurance. At first glance, an insurance of this sort has got a lot of downside:

  • You pay an annual fee of 250-350 CHF (or more depending on the size of the property)
  • If you damage your rented apartment, they will pay the landlord for any justifiable damages
  • Sometime later the insurance will require you to repay the money they paid to the landlord.

In summary, you pay an annual fee and for the damages that incur. In my experience the latter happens when you decide to move to a new place.

Even the Mieterverband recommends to pay the security deposit instead of the rental guarantee.

However, what they forget to consider is the opportunity cost. If I put the money in the equity market (especially now when the markets have taken a beating), this could provide a much better return, (~7% on average) covering the costs of the annual premium (~4%) and a surplus covering inflation (~3%). Whereas money in the bank will lose value to inflation in real terms.
Have I missed something?
We do plan to stay in the new place for at least 5 years.

You haven’t. As long as your investment return is above the premium paid, the maths works.

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It’s not really an insurance. You pay the premium so just to cover the capital, nothing else. Any damages will be paid by you anyway.

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While in theory it might make sense there’s a few things to remember. You’re comparing a 0% return (which might change, if inflation stays high, risk free rate will get higher and those accounts will also give you some return), to a -4% + highly volatile return.

So in one case you’re guaranteed to get 100% (or more back), in the other you might be -30% or more after 5y (and still owe money to the insurance), it won’t be predictable.

In the end I highly doubt it’s worth optimizing (regardless of whether it makes sense), we’re talking about a few thousands francs, that won’t make a meaningful difference to your financial journey.

Unless you’re already 100% or more invested in equity, to me it wouldn’t make much sense (and I personally wouldn’t recommend being 100% invested, esp. if you’re getting started).

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Over 20+ years maybe, not a handful of them renting a single apartment.
Similar principle can be taken as “not investing the money you might need within next 5ish years”.
Edit: I see you mention planning to live there for 5+ years. In that case you could indeed consider it (but plans change).

I personally don’t like giving them “free money” for such “low” amounts (overall, a couple of K - depends of course how high your deposit would be), so I just do a cash depo and fuhgedaboudit.

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Actually there’s a good way to think about that decision.

[this assumes you’re currently paying the insurance]

If you had the choice between:

  • 4% guaranteed return
  • stock market return

What would you do? While the latter might return more for very long time horizon, the 4% is a way better deal (it’s a very good risk/return ratio, given that risk free rate is still around 0%, there’s no savings account offering 4%).

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I am very much interested in how much global stocks market return long term in CHF. I am not completely convinced yet, but for now my conclusion is to not expect more than 5% p.a. in CHF. Add volatility of returns and you will see that the security deposit is not such a bad deal actually.

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Agreed. If interest rates change to the upside, then a security deposit is indeed a lot more attractive. For most of the insurances I checked, there’s a 1 month notice period. You can always cancel the insurance and move to a security deposit if conditions change.

How do you get to the 4% guaranteed return?

By cancelling the insurance.

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The way I see it, I’d be giving away free money either way. It’s either to the bank, where they lend out my deposits to others to make money, or the insurance in form of premium payments.

In my case it’s 7’000 CHF, which I don’t consider low amount.

Other than investing into a market index, I would also have the possibility to purchase shares form where I work at a 20% discount. The dividend payments alone would cover 90% of the annual premium payments. In addition, my company has been increasing dividend payments on a regular basis for close to 10 years, If I remember correctly. Anyways, nothing is certain these days and difficult to predict the future.

By not paying the premium/fee for the rental guarantee insurance.

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That was not in the original input data for the exercise :joy:. You are welcome to consider different options, for example also using these money to buy into 2nd pillar, but then calculate results in a comparable way.

Thank you for having open this thread, I’m currently in the same situation. I’ll move to a different apartment in a few months and was asking myself which one to chose between insurance and security deposit.

I was considering the insurance as for our current situation with my girlfriend, we will both have news jobs in December and January (for her) and we will have to pay maybe for 1 to 3 months two rent :sweat_smile: (we are in discussion to take our new appartement in January or March and we already terminate our current appartement for the end of March.

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Thinking more about it: if you have/consider to have any mid-long term cash deposit - bonds, mid term notes, etc - of a comparable duration, than depositing money as a rental guarantee is attractive, as you avoid paying premium for a comparable guarantee insurance. If you are decided to have only cash buffer and long term stocks/pension plan/etc investment, then rental deposit insurance is an option if the rest of calculations works out.

And I have just remember one more idea that I saw in older posts. Financial difficulty? IB to rescue! The idea was: take a loan at IB (currently 2% p.a. I guess) and use it for the security deposit. You can keep it or you can pay it back according to how you feel.

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I think those insurance are so expensive because the target are people who don’t have any cash reserve and are more likely to default on it.

If that’s not the case for you, you could probably get a cheaper loan (e.g. margin)

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From the renter’s perspective, using a rental guarantee insurance is like taking a loan. You pay interest (premium) and you have to reimburse the principal (any money they have to advance).
Usually the interest (premium) is quite unfavorable and it should be possible to find better alternatives.

Frankly, I consider this service to be a borderline scam that shouldn’t be allowed. It shouldn’t be ok to offer insurances that don’t actually cover any liability. They should be clearly labeled as loans/debt. Imagine having to pay vehicle or medical insurance only so the claim is paid upfront, but then you need to pay it back :clown_face:

Rants and personal opinions aside, I blocked my own money for the deposit, as I find this to be an insignificant optimization on the scale of FIRE and an unnecessary risk.
Worth noting, many household insurances cover the majority of unintentional damages that could come out of your deposit.

You probably already know this, but just in case: if you find a willing and solvent renter you can liberate yourself from the lease “anytime”.

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Yes, I know :slight_smile:

To be complete about our (my girlfriend and I) situation: my girlfriend just find a new job in Bern recently, like, one week ago. She will start on the 1st of January. Initialy, we’ve planed to take our new appartment in March and to pay 1 extra rent for this month. However, with this good news, we are currently negotiating to take our appartement in January, and the organization would become a mess in a really short time. Finding a new renter would be hard, but not impossible.

Interesting point of view on which I cannot disagree. People’ opinions about this topics are gold in this time. Thanks a lot.

On the subject of margin loan vs insurance:

I’d like to point out that interest cost is tax deductible, while insurance is not.

So at a marginal tax of 30 % a margin loan at, say, 3 % would have an after tax cost of 2.1 %.

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