Personal equity

News from DL MoneyPark and information on the financial market and Swiss romande real estate

Author : Kristen

Withdrawing or using the LPP as collateral

To become a homeowner, you have to obtain a mortage loan in most cases. Generally, financial institutions require a minimum of 20% personal equity. Your equity can come from your personal savings, titles, 2nd and 3rd pillars, a third party loan, an increase in the debt of a friend or relative, a building lot, or work you do yourself.

The interest rates guaranteed by investments are often less than the minimum occupational pension plan (LPP) rate. It is therefore to your advantage to use your savings to finance your personal equity. Another advantage: the payment rate of your pension fund may bring in more than the cost of the mortgage loan. This depends on the marginal tax rate.

Theoretical example, not adapted to current rates

If CHF 100,000 is left in the pension fund instead of being invested into personal equity, we will create a mortgage loan of CHF 100,000 with a fixed rate for 10 yrs at 3.60% (to compensate for the non-investment of the CHF 100,000). If the marginal tax rate is 40% (taxable income around CHF 150,000) and given that mortage interests are deductible from taxable income, you will achieve a tax savings of 40% on the mortgage rate. The net mortgage interest rate will be 3.60% - (3.60% x 40 %) = 2.16%. The pension fund offers, for example, 2.75%, so you earn 0.59% (net tax) on your capital of CHF 100,000.

That's not all

Mortgage loan intest is linear, so you will pay 2.16% (understood tax savings) on CHF 100,000 over 10 years, totaling CHF 21,600. On the contrary, the payable interest from the pension fund is composit. Your pension fund account will show at the end of the first year CHF 100,000 + (100,000 x 2.75%) = CHF 102,750. The following year, the 2.75% will be posted at CHF 102,750, with a 10 yr total of CHF 131,165.

In order to optimise your taxation, you will need to invest even in your pension fund. In fact, under certain conditions, some financial institutions allow for an increase in mortgage debt to 90% and even 100% of the value of the property or purchase price. In this situation, the cash allocated to personal equity will allow you to pay the missing contributions from your 2nd pillar, assuming that the pension fund accepts it.

By using your pension plan as collateral, you benefit from the following advantages:

  • additional interest on debt is covered, either entirely or in part, by the pension fund's mandatory return
  • increase in retirement, disability and death benefits (according to the rules of the fund)
  • total redemption, including additional interest on the debt, is deductible from your tabale income
  • total debt (90%-100%) is of first rank
  • withdrawal possibility of your vested benefits after several years to reduce your debt. Obviously, tax will be levied and a profitability calculation is necessary, but in principle, the withdrawal tax is less than what you would save by redemption.

There are a few other rules not mentioned above that will need to be followed in order to fully benefit from this strategy. Do not hesitate to contact us.

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