Misconception when buying a house: "If you amortize the mortgage, you pay on it."

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There are many preconceived notions when it comes to real estate finance. We are confronted with this every day. But what is it really about? Today we ask Andreas Leu, branch manager at MoneyPark in Winterthur: Do I really have to keep my mortgage so that my tax burden does not increase?

Unlike in other countries, it is customary in Switzerland to hold the mortgage for a very long time. Many homeowners choose to keep the mortgage even if they have the means to pay it off. In this way, they offset the so-called imputed rental value.

The imputed rental value results from the acquisition of owner-occupied property and is added to taxable income. The value is determined at the cantonal level and the calculation methods are just as diverse as the number of Swiss cantons. In any case, the following applies: income increases and with it the tax burden. This can be counteracted partially or completely. Interest costs on the mortgage that you took out to finance are fully deductible from your taxable income. Furthermore, maintenance costs can be deducted.

Take Ms. A, for example. She has owned a 140m2 house in Zurich since 2005. The tax value of the property is 910,000 Swiss francs. The mortgage amounts to 845,000 francs with an interest rate of two percent. As a result, there is talk of 16,900 francs in interest costs that she can deduct annually from her taxable income. In our example, the estimated imputed rental value is 32,500 Swiss francs. Taking into account the flat-rate deduction for the maintenance of the property, we ultimately receive an increase in taxable income of 9,100 francs per year.

Ms. A. now inherits 100,000 francs and asks herself the following questions: Should I use this amount to repay part of the mortgage and thereby reduce the interest burden? Or should I keep the mortgage amount to avoid a tax hike? What do I do with the 100,000 francs?

Such a scenario has to be checked individually. If she repays 100,000 francs on the mortgage, this corresponds to annual savings of 1,400 francs after tax, at a marginal tax rate of 30 percent.

If she now maintains the mortgage in the same amount and invests the 100,000 francs differently, the annual profit must be more than 1,400 francs net for it to pay off. This corresponds to a net return of 1.4 percent per year. Such a net return can certainly be achieved, for example with pillars 3a and b, the 2nd pillar, investment properties or investments. This requires a thorough clarification of the personal risk profile and the individual investment strategy.

So if you are faced with the choice of amortizing or keeping your mortgage, it is worth taking a detailed look at the overall situation. Various aspects should be included in the decision-making process, because just trying to counteract the imputed rental value is not enough. MoneyPark will be happy to analyze your individual situation and work with you to find the solution that best suits you.

Andreas Leu
Branch manager Winterthur
[email protected]