Advance withdrawal or pledge?
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Advance Withdrawal or Pledge?

Generally the bank will approve a mortgage if you have at least 20% of the purchase price in equity. If you do not have sufficient equity, you can take money from your pension fund as financing. There are two options: advance withdrawal or pledging. Advance withdrawal increases the equity and reduces the interest rate. Pledging increases debt capital and reduces the tax burden.

Residential property is considered a secure means of retirement provision in Switzerland. Investing in your own home can be worthwhile because it can help you save on housing costs and taxes. Generally, banks demand 20% equity for residential property. If you do not have sufficient equity, you can take money from your pension fund for owner-occupied property, to pay off a mortgage, or to buy shares in co-operative housing associations and similar investments. However, you still need some money of your own: The Bankers Association requires that for new mortgages and credit increases, at least 10% of the purchase price cannot come from a pension fund.

Money from the Pension Fund for Residential Property Abroad

Residential property abroad can be financed from pension fund assets only if the owner's domicile or regular place of residence is located there. Vacation and second homes cannot be financed with pension fund assets. Moreover, pension fund assets cannot be used to finance general living costs, such as for repairs, or to pay mortgage interest.  

Advance Withdrawal or Pledging?

There are two options for financing residential property with money from the pension fund: advance withdrawal and pledging. Advance withdrawal of money from the pension fund increases your equity. This gives you more money to buy your own home. Because the mortgage is smaller, you pay lower mortgage interest, which can be an advantage if your budget is tight. However, you will have gaps in your pension coverage that must be covered in some other way. Pledging gives you additional debt capital. Because the property is largely financed with debt, you will pay more mortgage interest. However, you will be entitled to tax advantages, and the payments from the pension fund for retirement, disability and death will remain unchanged.

Advantages 

Pledging 
  • No reduction in capital/benefits (on the provision that the pledge is later nullified)
  • Higher tax-deductible mortgage interest
  • No tax effects on the pension fund capital
  • Pension benefits can still be purchased
Advance Withdrawal 
  • Lower mortgage and therefore lower monthly housing costs
  • Advance withdrawal reduces the progressive tax amount (in the case of a payout of the pension fund assets upon retirement, as the payment amount will be reduced by the advance withdrawal amount at this point)

Disadvantages 

Pledging 
  • Higher housing costs
  • The homeowner bears the full mortgage interest burden
Advance Withdrawal 
  • Capital withdrawn must be taxed and funds must be available to pay this tax
  • Reduced pension/capital upon retirement (lost interest and compound interest can be significant)
  • Reduced benefits in the event of disability or death
  • Obligation to repay the amount withdrawn if the criterion for owner-occupied residential property is no longer met (in this case, it is possible to reclaim the tax paid)
  • Pension benefits cannot be purchased (until the advance withdrawal has been repaid)