Amortisation / Life insurance

Published by : dl

Amortisation / Life Insurance

Amortisation is the repayment of all or part of a mortgage loan in equal instalments, usually on an annual basis.

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Direct amortisation

We understand direct amortisation to be repayment in regular instalments, directly from a mortgage loan to a lending bank. Consequently, each instalment reduces the debt and interest while increasing the tax burden. 

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Indirect amortisation

The basic principle of indirect amortisation is to maintain a constant level of mortgage debt throughout the entire loan term. Instalments are not paid directly to the mortgage account, but rather to a private 3rd pillar linked pension plan and/or private 3rd pillar linked insurance.

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Direct or indirect amortisation?

Here is a quantitative comparison of a direct and an indirect amortisation scenario:

Example: simplified calculation for a loan of CHF 500,000 for one year (fixed rate of 3%) with an annual amortisation of CHF 5,000 and a marginal tax rate of 35% (taxable income around CHF 120,000).

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3rd pillar bank deposit

The 3rd pillar bank deposit is a private pension account that is blocked under certain conditions. This plan offers more flexibility regarding contributions as well as a low administrative fee because it does not include any insurance benefits.

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3rd pillar insurance

In the case of disability or death following and illness, the 1st pillar (old age and survivors' insurance (AVS), disability insurance (AI), and income compensation (APG)) and the 2nd pillar (occupational pension fund (LPP)) usually provide only part of the previous income. There are multiple variations, which are all dependent on pension fund benefits. To address these deficiencies, an insurance product is even more desirable if the pension plan has been withdrawn to purchase a property.

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Linked 3rd pillar A

An employee subject to the occupational pension plan (LPP) can sign up for the linked 3rd pillar A up to CHF 6,826 /year from 1 January 2019 . For workers and the self-employed without LPP, it is 20% of net profit from activities up to a maximum of CHF 34,128 /year starting in 2019 .

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Private 3rd pillar B

The possibility of taking out a private 3rd pillar B (or unrestricted) pension insurance is o offered to everyone who lives in Switzerland or abroad, whether employed or not. Such insurance is ideal for a housewife or an employee who intends to terminate his or her gainful activity in the near future.

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Whole life insurance

This type of insurance is not well known because few companies offer it in their range of products. Nevertheless, it is an ideal "tool" that should be considered in personalised advice on real estate financing, distribution during lifetime, and inheritance planning.

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When rates are low, should we amortise more?

Loan amortisation refers to the portion of capital that is paid back at the end of each period, for example quarterly. Mortgage loan debtors must reduce their commitments to 2/3 of the value of the property. But in absolute terms, is it a good idea to amortise?

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