Mortgage Amortisation in Switzerland

The two-tranche structure

Swiss mortgages are typically structured in two tranches. The first tranche covers up to 65 percent of the property value. This tranche does not need to be amortised — it can be maintained as an interest-only loan indefinitely, as long as the borrower continues to meet the affordability test. The second tranche covers the portion between 65 and 80 percent of the property value.

The second tranche must be amortised (repaid) within 15 years or by the time the borrower reaches retirement age (65 for men, 64 for women), whichever is earlier. This means that buyers who take out a mortgage at age 50 must amortise the second tranche within 14 to 15 years.

Direct vs indirect amortisation

Amortisation can be direct or indirect. Direct amortisation involves making regular repayments that reduce the mortgage balance. Each repayment reduces the outstanding mortgage, which reduces the annual interest cost but also reduces the mortgage interest deduction for tax purposes.

Indirect amortisation involves making regular contributions to a 3rd pillar pension account (pilier 3a) that is pledged to the bank as security for the mortgage. The mortgage balance does not decrease during the amortisation period — instead, the 3rd pillar account accumulates, and the funds are used to repay the mortgage at maturity. Indirect amortisation preserves the mortgage interest deduction and allows the 3rd pillar contributions to grow tax-free.

Tax implications

The choice between direct and indirect amortisation has tax implications. With direct amortisation, the mortgage balance decreases over time, which reduces the annual mortgage interest deduction. With indirect amortisation, the mortgage balance remains constant, preserving the full interest deduction throughout the amortisation period.

3rd pillar contributions (up to CHF 7,056 per year for employed persons in 2024) are deductible from taxable income. This makes indirect amortisation tax-efficient — the contributions reduce taxable income while the funds grow tax-free in the 3rd pillar account.

Planning for retirement

Swiss banks assess mortgage affordability not only at the time of application but also at retirement. If the mortgage will still be outstanding when the borrower reaches retirement age, the bank will assess whether the borrower's retirement income (pension, investment income) is sufficient to service the mortgage under the affordability test.

Buyers who are approaching retirement should plan their mortgage structure carefully — ensuring that the second tranche is fully amortised before retirement and that the remaining first tranche can be serviced from retirement income.

Key points

• First tranche (up to 65% LTV): interest-only, no amortisation required
• Second tranche (65–80% LTV): must be amortised within 15 years or by retirement
• Direct amortisation: reduces mortgage balance; indirect: 3rd pillar pledge
• Indirect amortisation preserves interest deduction and grows 3rd pillar tax-free
• Plan for retirement: bank assesses affordability at retirement age