Why partial amortization of the mortgage usually pays off compared to other investment alternatives.
Safety instead of risk: homeowners can also achieve a return with a partial amortization.
Illustration: Christina Baeriswyl
I receive around 200 from an inheritance‘000 francs and have a mortgage debt of 300‘000 francs. My mortgage will expire in the fall. I only take out a Saron mortgage for one year at a time so that I have the option to repay it. I think the best thing would be to use my stake to pay off part of the mortgage. Is this a good idea? Readers question from BJ
Yes, I think that’s a good idea. With an amortization you save the interest that you have to pay the bank and create more security in old age. You have the certainty that you can stay in your home for as long as you want and that your health allows it. Interest rates are still low and the financing of your mortgage is cheap, especially since you are using a money market mortgage that is linked to the Saron reference rate – i.e. the Swiss Average Rate Overnight. Even if you only have to pay 0.8 percent interest, this is still 2,400 francs for 300,000 francs. With a partial amortization of the mortgage for the inheritance, you would only pay CHF 800 per year afterwards, i.e. save CHF 1,600. For you, the interest saved is effectively a return on your money.
Now you could of course also invest the 200,000 francs. You could buy stocks with an attractive dividend yield. Some Swiss blue chips such as Roche, Nestlé, Swisscom, Zurich, Swiss Re, LafargeHolcim or Swiss Life generate dividend yields of between 2 and 5 percent. You would have additional income every year, which you would have to pay tax. The catch: dividends are never guaranteed. Above all, you would have to be prepared to bear the greater price fluctuations that are always associated with stocks. This also applies to other systems that promise a higher return.
Are you prepared to accept strong fluctuations or do you want to take as little risk as possible?
On the other hand, you could directly compare the interest saved with a return that you would achieve on very safe Swiss franc bonds. But there is the problem that bonds from first-class borrowers in Swiss francs hardly bring a return, depending on their term. The yield on the Confederation’s federal bonds is even still in the red. If you were to hold these high quality bonds, you would be effectively losing money.
Compared to the returns on secure and less volatile Swiss franc bonds, the interest saved on your mortgage through the partial amortization is not that bad. You need to consider how much risk you want to take with the money you inherit. Are you prepared to accept strong fluctuations or do you want to take as little risk as possible? Depending on your answer, your consideration of partially amortizing the mortgage with the money you inherited will be weighted differently.
Your decision also depends on your other financial situation. Partial amortization of the mortgage makes sense if you also have enough reserves for unexpected expenses as well as sufficient funds in old age and are certainly not dependent on this money to meet your standard of living. Because a later topping up of the mortgage should hardly be possible in old age. But if you have enough funds and don’t want to take any risks, I consider partial amortization with the inherited money to be a sensible solution.
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