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, in some cases it can make sense to repay your mortgage. Find out when voluntary repayment is beneficial and when it is better for you not to pay off any more of your mortgage.
Repayment of a first mortgage is voluntary
If you take out a mortgage, you owe money to the bank. When you pay off this debt, you are repaying your mortgage. Repaying a second mortgage is mandatory.
In contrast to a second mortgage, repayment of a first mortgage is voluntary. Additionally, in the case of a LIBOR mortgage or a fixed-rate mortgage, repayment is only exempt from charges after the term has expired. That said, there are good reasons to repay your mortgage if you have free capital available. There are also good reasons not to. An overview:
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 the property.
It should also be noted that the value of real estate can change. The best-case scenario is for it to increase over time. A property can also lose value, however. 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 use voluntary mortgage repayment to pay off the debt. This allows them to reduce their personal indebtedness and increase their share in the value of the property.
Reasons against repayment of a first mortgage
Not repaying means lower taxes
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 income. At the same time, the law allows you to deduct interest on mortgage debt from your income. As a result, it may make sense not to repay a mortgage and thus retain 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 three percent. This return is larger than the interest rate savings 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 investment and invest in government bonds or keep your capital in a savings account, then the return is much lower. The interest saved through repayment could then be higher than the return you are missing out on.
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. Will I save more if I have to pay less interest, or is this outweighed by the tax benefit? Can I obtain a higher return with the capital than I would save in interest? Do I need free capital, or can I afford to repay my mortgage?
It is not so easy, however, to weigh up all these factors. And even if your calculations show that repayment would be worth it, there may be other arguments against it. So, it is worth seeking the advice of an expert.