Paying off your mortgage – reasons for and against voluntary repayment
Compared to their international counterparts, Swiss property owners have large mortgage debts, which they often do not pay off. There are good reasons for this. Nevertheless, it can make sense to repay a first mortgage, even when there is no obligation to do so. Find out when voluntary repayment is beneficial and when it is better for you not to pay off any more of your mortgage.
Paying off your mortgage: Mandatory or voluntary
If you take out a mortgage, you owe money to the bank. This can be done directly or indirectly. Repaying a second mortgage is mandatory.
In the case of a fixed-rate mortgage, repayment of a first mortgage is only exempt from charges after the term has expired or if an annual repayment was agreed when the mortgage was taken out. Only with a variable-rate mortgage is repayment possible at any time. There are good reasons to repay your mortgage voluntarily if you have free capital available.
Reasons to repay a first mortgage
Repaying your mortgage means lower interest payments
The higher the mortgage interest, the larger the monthly cost. Interest thus plays a key role when considering whether to repay your mortgage. If you repay CHF 100,000 of your mortgage at an interest rate of 2.2 percent, you will save CHF 2,200 per year in interest costs. At an interest rate of 1.2 percent, this saving would only be CHF 1,200. The higher the interest rate, the more worthwhile it is to repay the mortgage.
Voluntary repayment reduces the debt-to-equity ratio
Mortgages are nothing more than debt. The thought of being in debt is unpleasant for many people. Some property owners also consider a large mortgage to be a burden, since the bank has often financed more than half of their property.
This means that the percentage of the mortgage increases compared to the value of the property, i.e. the debt-to-equity ratio increases. Homeowners can pay off their debt to the bank by means of repayments. This allows them to reduce their personal indebtedness and increase their share in the value of their home.
Reasons against repayment of a first mortgage
Debt repayment makes little sense from a tax perspective
Taxes have to be paid on real estate – first on the property as an asset, but also on the imputed rental value, which is added to your taxable income. At the same time, the law allows you to deduct interest on mortgage debt from your taxable income. As a result, it may make sense not to repay a mortgage and thus retain the tax advantages in the form of this potential deduction.
Return opportunities missed due to repayment
If you use your free capital to repay your mortgage, this money is not available for other purposes. In particular, it cannot be invested to obtain a return. The amount of return you miss out on will depend on your personal risk tolerance.
Suppose you invest in equities and achieve an annual return of 3%. This return is larger than the interest rate saving would be if you repaid your mortgage. In this case, you would be worse off by repaying. If you are more focused on security in your investments and invest in government bonds, for example, or keep your money in a savings account, then the return is much lower. You then benefit more from the interest saved through repayment than from the return on your investments.
Provide security: Hold onto liquid assets instead of repaying a mortgage
Freely available capital can offer security, especially if you plan on renovating your home or retiring soon. After all, no one can guarantee that you can increase your mortgage once you have repaid it.
If you choose not to repay your mortgage, you can cover the renovation with your own funds. Furthermore, older people in particular are sometimes glad if they have savings that can be used to supplement a small pension. So it is rarely worth trying to achieve a debt-free house and completely repay your mortgage.
In sum: Mortgage repayment has both benefits and drawbacks
It is not possible to give a general recommendation on voluntary repayment. You need to consider each factor individually. What is my financial situation? Will I save more if I have to pay less interest, or is this outweighed by the tax benefit due to potential deductions? Can I obtain a higher return with the money than I would save on interest payments? Do I need free capital, or can I afford to repay my mortgage?
If you choose not to repay your mortgage, you can cover the financing of renovation with your own funds. Furthermore, older people in particular are sometimes glad if they have saved up money that can be used to supplement a small pension. So it is rarely worth trying to achieve a debt-free house and completely repay your mortgage.