Direct or indirect repayment – the right method of repayment for you
When it comes to repaying the second mortgage on a property, there are two ways of doing so: direct repayment or indirect repayment. Both options have advantages and disadvantages. When thinking about your mortgage repayments, you should take a long-term view and consider your personal circumstances.
With direct repayments, you pay regular installments back to the bank. This steadily reduces the mortgage debt and thus your interest payments. At the same time, your tax burden increases, since the repayments made to the bank reduce the amount of debt and interest that can be deducted from your taxable assets and income.
The main advantage of direct repayment is that the interest expenses for the property decrease each year, provided mortgage interest rates remain the same or fall. As a result, the proportion of disposable income increases. This capital would be useful for a targeted pension plan, for instance.
Payments are not made directly to the mortgage account but are saved indirectly in a pension account or pension securities account (Pillar 3a). When the borrower turns 65 at the latest, the capital is transferred to the bank as repayment of the second mortgage, which is then paid off.
The advantage of indirect repayment is that over the years the entire mortgage debt can be deducted from taxable assets and the mortgage interest from taxable income. During this period, you may make contributions to Pillar 3a up to a statutory maximum amount each year. These contributions can likewise be deducted from taxable income. Property owners therefore save twice when repaying their mortgage. If withdrawn for indirect repayment, the capital saved in Pillar 3a is taxed, albeit separately and at a lower rate.
Direct or indirect repayment?
The repayment method that is right for you will depend on your personal situation, your own financial options, and tax issues. There are also interesting securities solutions for Pillar 3a. It makes sense to have our experts calculate your options in order to optimize your repayments from a pension perspective as well.