Indirect amortization is only of limited interest (or you want to invest as much money as possible in shares)

With an indirect amortization of the mortgage, you can reduce your taxable income. This is because, on the one hand, you pay more interest on the debt and can therefore also deduct it and, on the other hand, because the payment into pillar 3a is also deductible.

However, indirect amortization only makes sense if you don’t earn enough to both pay into pillar 3a and properly amortize your mortgage. Because, if you have sufficient money to accomplish both, indirect amortization is not worthwhile. The only remaining advantage is the higher interest on the debt, which can be deducted from the taxable income. It is better to save this higher debt interest entirely.

Exception:
You want to invest as much money as possible in shares. Then indirect amortisation is worthwhile. You only have to put money in your hand once, and you have done both (Pillar 3a deposit & amortisation) at once. This leaves you more money to invest in securities. This strategy is interesting if you assume that in the long term you will earn more with shares than you pay in mortgage interest.

Indirect amortization is always interesting for the bank

If indirect amortization is nevertheless described as advantageous across the board, this is due to a conflict of interest. For the banks, it is advantageous if their customers amortize the mortgage indirectly:

  • For one thing, it allows the banks to charge more interest on the debt.
  • For another, the banks also earn money on the 3rd pillar, because this usually has to be held at the same bank as the mortgage for indirect amortization.

Therefore, as you can see, even if indirect amortization often seems very interesting, it is not necessarily because you(!) profit from it.

How does indirect amortization work anyway?

Indirect amortization is easy to explain. A 3a account or a 3a insurance scheme is pledged in favor of the mortgage. By (having to) pay into this 3a product periodically, the net debt (= mortgage minus pledged 3a assets) will be reduced over time.

The indirect amortisation via the pledged pillar 3a pledged.
Indirect amortization with unchanged mortgage amount, but decreasing net debt.

Example: Development of a mortgage debt of CHF 800’000 with indirect amortization (interest rate assumption: 1.0 %)

By year:Amortization
indirect		3rd pillar
(pledged)		Residual debtInterestNet debt
15’0005’000800’0008’000795’000
25’00010’000800’0008’000790’000
35’00015’000800’0008’000785’000
45’00020’000800’0008’000780’000
55’00025’000800’0008’000775’000
65’00030’000800’0008’000770’000
75’00035’000800’0008’000765’000
85’00040’000800’0008’000760’000
95’00045’000800’0008’000755’000
105’00050’000800’0008’000750’000
115’00055’000800’0008’000745’000
125’00060’000800’0008’000740’000
135’00065’000800’0008’000735’000
145’00070’000800’0008’000730’000
155’00075’000800’0008’000725’000

he payment into the 3rd pillar is limited to the maximum amount. If more than this maximum amount has to be amortized annually, only part of it can be amortized indirectly through the 3rd pillar.

Direct amortization:

With direct amortization, the mortgage is paid off with regular payments. As a rule, the second mortgage must be repaid within 15 years, or by retirement at the latest. In contrast to indirect amortization, direct amortization reduces the interest rate charged on the mortgage.

Direct amortisation reduces the mortgage debt and thus also the interest burden
 Direct amortization with decreasing mortgage debt

Example: Development of a mortgage debt of CHF 800’000 with direct amortization (interest rate assumption: 1.0 %))

By year:Amortization
direct		Residual debtInterest
15’000795’0007’950
25’000790’0007’900
35’000785’0007’850
45’000780’0007’800
55’000775’0007’750
65’000770’0007’700
75’000765’0007’650
85’000760’0007’600
95’000755’0007’550
105’000750’0007’500
115’000745’0007’450
125’000740’0007’400
135’000735’0007’350
145’000730’0007’300
155’000725’0007’250