Principal (amortization)

A good strategy in term of payment of the principal (or amortization) will allow you to save a substantial amount of money. Therefore, this aspect is important to discuss thorougly.

If you are already a home owner and want to make sure you have made the right choice in term of the payment of the principal, we will gladly look at your situation, and modify it if necessary.

Is the payment of the principal mandatory ?

According to the ASB guidelines (ASB = Association Suisse des Banquiers), if the mortgage requested represent more than 66% of the value of the property, it will be asked of you to reduce the amount of the mortgage over a certain period of time.

Below, we explain to you the two ways you can pay the principal :

Direct amortization (in french, “amortissement direct”) :

Exemple : you have been approved for a CHF 800k loan on a property you purchased for CHF 1 mio. You will therefore need to reduce the amount of the mortgage to CHF 660k at least in a span of 15 years maximum. The part of your mortgage representing 66% or less of the value of your property is called the 1st rank (in french, “1er rang”). Any amount loaned to you exceeding the 1st rank is called the 2nd rank (“2ème rang”). In very simple mathematic terms :

1st rank : CHF 660’000.-

2nd rank : CHF 140’000.-

Minimum annual payment of the principal : CHF 140’000 / 15 years = CHF 9’330.-

If you choose the option of the direct amortization, an amount of CHF 2’332.- will be paid every quarter (March / June / September / December).

With that exemple, the mortgage amount will be reduced during the first 15 years of the contract. Once that time has passed, it will be up to the mortgage holder(s) to decide if they want to keep on paying the principal (not mandatory).

Assuming that the interest rate is 2%, the mortgage holder(s) will save CHF 186.- the first year (CHF 9’332.- x 2%), then CHF 372.- the next year, then CHF 558.-, and so forth.

It is important to take into consideration that the less interest you pay to the mortgage provider, the less you can deduct from your taxable income.

Indirect amortization (“amortissement indirect”)

In that case, the amount of CHF 9’330.- (as mentioned above) will not be paid directly each year to the mortgage provider, but will be added into a tax deductible and/or non tax deducible 3rd pillar plan (which will be contractually pledged to the mortgage provider). At the end of the mortgage contract, you will have the choice between withdrawing the amount added to your 3rd pillar in order to reduce the mortgage at once, or keep on pledging the amount.

Today, the indirect option is chosen by most mortgage holder(s), because you will be able to save substantial amount of money through tax deductible 3rd pillar plans.

The above calculations are based on a loan representing 80% of the purchase price. If you were to obtain a 90% loan (possible through the pledging of your pension funds for exemple), the payment of the principal will increase, since you’ll need to reduce the difference between 90% and 66% in a span of 15 years.