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Old 31.08.2015, 13:00
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How to structure the mortgage?

I'm about to sign a mortgage for our new apartment and the advice I keep getting from banks is invariably similar.

They recommend a mix of long-term (7-10y), medium term (4-7 years) and Libor mortgage to optimize the cost and risk over time. I admit, it does look good price-wise for today, but is it really the best way to go?

There is hardly any room for rates to move lower, but always a risk that they will go higher. I'm therefore thinking it may not be the best idea to take the medium term option and just go for one, long-term fixed mortgage. Or perhaps two long ones (7/10 years mix)?

There's also LIBOR which is of course the cheapest, and may continue to be for some years to come, but once LIBOR starts creeping up, also the cheap fixes will be history. At the moment I'm considering to have the 2nd mortgage as LIBOR, so a relatively minor chunk which I would be able to repay in cash if under pressure.

Then is the choice between direct and indirect amortization. If I go with indirect, 1% would be under the tax-free limit for Pillar 3a. Does it make sense to go with slightly higher amortization (1.2-1.3%) to tax optimize? Or maybe repay directly, but still deposit money into a 3rd Pillar fund not pledged to the apartment? Or amortize 1% into 3rd Pillar and then open another 3rd Pillar account elsewhere to optimize the tax?

What seems to be the best way to go? My mortgage will be for around 500k CHF.
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Old 31.08.2015, 13:06
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Re: How to structure the mortgage?

personally, i would go for one chunk at long term 10+ years. the rest at LIBOR to keep cost down.
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Old 31.08.2015, 13:13
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Re: How to structure the mortgage?

Be careful if you split the mortgage, a lot of banks will not allow you to have 50% with them and 50% with another bank, so it makes life VERY hard to change the mortage as different amounts are due at different times.

For time being i would look at 50% or more on LIBOR, very little chance the BNS will or even can increase interest without destroying the economy totally.

Otherwise maybe look medium term, all depends on how much it is and how able you are to pay back early if you want too.
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Old 31.08.2015, 13:23
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Re: How to structure the mortgage?

I'm typically comparing with Migros rates as they are good and published online:
https://www.migrosbank.ch/de/privatp...thypothek.html

Best deal seems to be up to 8y. The 10y is already 0,25% more expensive which makes little sense to me (it's like taking the 8y plus the remaining 2 years at ~3%).

Current LIBOR offer rates are 0.8%-0.9% (they use 0% as bottom level for reference).

How about the amortization, what would you advise?
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Old 31.08.2015, 14:25
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Re: How to structure the mortgage?

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I'm typically comparing with Migros rates as they are good and published online:
https://www.migrosbank.ch/de/privatp...thypothek.html

Best deal seems to be up to 8y. The 10y is already 0,25% more expensive which makes little sense to me (it's like taking the 8y plus the remaining 2 years at ~3%).

Current LIBOR offer rates are 0.8%-0.9% (they use 0% as bottom level for reference).

How about the amortization, what would you advise?
Amortization, as little as possible if interest rates stay low, it also doesn't make any sense for taxation.

8Y v LIBOR is around 0.6-0.7% difference, all depends on the amount of the loan, your appetite for risk and your savings that could be used to pay the mortgage off.

You will NEVER hit the bottom of the market as you will never hit the top. Until the US, UK and Euro raise interest rates there is not a hope in hell the Swiss will raise first.

Take a LIBOR as soon as interest rates rise in US/UK/Euro then go and block your rate if you really want peace of mind.
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Old 31.08.2015, 15:10
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Re: How to structure the mortgage?

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Amortization, as little as possible if interest rates stay low, it also doesn't make any sense for taxation.
Maybe not for taxation, but either way someone will get your money:

1. If you want the bank to have your money, don't Amortize (or do the minimum).

2. If you want the government to have your money, amortize.

At least with the second option you get to own more of your house, which if the markets go belly up means you are less likely to be asked by your bank to increase the capital on your property.

Alternatively, if you are a financial wizard and believe that you can make more than the banks are charging you in interest, then don't amortize and invest and hope to make more than you lose.

Note about LIBOR: all the LIBOR options have an opt out clause if the rates rocket upwards, so you can choose this as a "safe" option.
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Old 31.08.2015, 15:23
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Re: How to structure the mortgage?

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Alternatively, if you are a financial wizard and believe that you can make more than the banks are charging you in interest, then don't amortize and invest and hope to make more than you lose.
You don't need to beat the interest rate unaided - you are already saving the tax rate from it by claiming it as cost. Say you have 1% interest rate and ca. 25% tax rate - effective interest rate you need to beat is 0.75%.

Given the SMI average annual growth for the last 30 years is >5% even without dividends that's a fairly safe bet.

Last edited by newtoswitz; 31.08.2015 at 15:40.
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Old 31.08.2015, 15:33
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Re: How to structure the mortgage?

I don't think I currently have an option not to amortize. It's typically specified at 1% minimum, until my capital is equivalent to 33.3% of property value.

The only question here is should I amortize through a 3rd Pillar or directly. If 3rd Pillar, should I pay in the minimum (1%) or optimize for tax-free amount (currently up to 6728 CHF). Alternatively, pay 1% into pledged 3rd Pillar account and the rest elsewhere.
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Old 31.08.2015, 16:05
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Re: How to structure the mortgage?

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Given the SMI average annual growth for the last 30 years is >5% even without dividends that's a fairly safe bet.
Yes, it is a bet. No, it is not safe.

Sorry, but every time I've invested I've come out worse - usually because of world stock market events that I have no control over, combined with a specific need for funds.

Maybe it is just my luck.

As ever, don't gamble with what you are not willing/cannot afford to lose.
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Old 31.08.2015, 17:12
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Re: How to structure the mortgage?

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Note about LIBOR: all the LIBOR options have an opt out clause if the rates rocket upwards, so you can choose this as a "safe" option.
I did not know there was an opt out on these LIBOR mortgages. They would normally run 3 months and run for another 3 months etc. So after 3 months you can opt out?


How does this opt out clause work? Thanks
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Old 31.08.2015, 17:15
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Re: How to structure the mortgage?

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I did not know there was an opt out on these LIBOR mortgages. They would normally run 3 months and run for another 3 months etc. So after 3 months you can opt out?


How does this opt out clause work? Thanks
You can convert into fixed-mortgage after any 3 month period. I'm not sure if this will ever work out favorably, as if the Libor starts skyrocketing, so will the fixed mortgages.
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Old 31.08.2015, 17:19
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Re: How to structure the mortgage?

We just split ours 50:50 (more or less) and fixed for 4 and 8 years. Our advisor from Raiffeisen gave us an extra 0.05% off the advertised rates for both. We will amortise indirectly into a 3a at roughly 0.8% p.a.
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Old 31.08.2015, 17:20
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Re: How to structure the mortgage?

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I did not know there was an opt out on these LIBOR mortgages. They would normally run 3 months and run for another 3 months etc. So after 3 months you can opt out?


How does this opt out clause work? Thanks
My mortgage is with COOP. The LIBOR offer I had (I changed it) allowed me 1 opt out to another product. This was a couple of years ago, so you would need to ask your bank for more details as they may vary according to the bank.
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Old 31.08.2015, 17:21
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Re: How to structure the mortgage?

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I don't think I currently have an option not to amortize. It's typically specified at 1% minimum, until my capital is equivalent to 33.3% of property value.

I would certainly try to amortise or pay back what you can to bring the mortgage total amount below 33% of the value of the house and I would suggest if you can as far as 50%. For that amount you could consider the LIBOR as it is the most flexible on paying back without any costs involved. The rest can be long term.


I do look at the house you live in as an investment to make money on. It is where you live. So be smart on your mortgage but do not use funds you may have used for paying for the house or fast pay back to invest in SMI etc.


All depending on your situation, future earnings, appetite...
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Old 31.08.2015, 17:24
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Re: How to structure the mortgage?

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You can convert into fixed-mortgage after any 3 month period. I'm not sure if this will ever work out favorably, as if the Libor starts skyrocketing, so will the fixed mortgages.

okay thanks, I understand. You could call that an opt out. the mortgage runs just 3 months. You can do that for the amount you need to get to the 33%. As mentioned it will need interest rate in EU to go up first. There will be enough time for you to react and you will build a buffer while the interest rates are low.
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Old 01.09.2015, 10:12
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Re: How to structure the mortgage?

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For time being i would look at 50% or more on LIBOR, very little chance the BNS will or even can increase interest without destroying the economy totally.
Yes, possibly, but Libor rates are not set based on their perceived impact on the economy. It is an interbank lending rate. If the economy heads towards that experienced in 2008 and the banks stop trusting each other, that rate could flash heavenwards. The only reason the rate stayed stable in that previous period was that the banks fiddled the rate downwards, to give the impression that they were considered creditworthy. They have, or are now paying massive fines for that and are unlikely to repeat the exercise.
If the rates do flash upwards, the banks will, of course, be ready to offer their mortgage customers replacements packages, at any rate they [the banks] choose.
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Old 01.09.2015, 10:47
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Re: How to structure the mortgage?

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okay thanks, I understand. You could call that an opt out. the mortgage runs just 3 months. You can do that for the amount you need to get to the 33%. As mentioned it will need interest rate in EU to go up first. There will be enough time for you to react and you will build a buffer while the interest rates are low.
You will never have time to react to surprise moves by the SNB, your memory is very short indeed.
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Old 01.09.2015, 11:31
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Re: How to structure the mortgage?

Someone correct me if I am wrong, but I thought that one big benefit of splitting your mortgage is to avoid nasty refinancing surprises at the end of the period.

If you have a 1m chf mortgage with 10 year fixed and by the end of it, rates are at 5%, you will have to refinance the remaining amount at 5%, ouch.

If you have a 5 year and 10 year split, and rates are 5%, you only have to initially refinance half the remaining amount at the higher rate.

Of course, you could say that the ten year fix would be good in that case because you got the whole period at a low initial rate, but that was the way it was explained to me.

Of course, I'll wait for more experienced hands to comment on this.
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Old 01.09.2015, 11:49
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Re: How to structure the mortgage?

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I don't think I currently have an option not to amortize. It's typically specified at 1% minimum, until my capital is equivalent to 33.3% of property value.

The only question here is should I amortize through a 3rd Pillar or directly. If 3rd Pillar, should I pay in the minimum (1%) or optimize for tax-free amount (currently up to 6728 CHF). Alternatively, pay 1% into pledged 3rd Pillar account and the rest elsewhere.
I would use the maximum tax allowance of the pillar 3a. The 20%+ initial tax kick is a big gain, and having any excess as a steady pension investment isn't a bad thing.

And I would also make sure to be investing elsewhere, as of course most of that "pension" pot is now nothing of the sort, it's a deferred mortgage payment.
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Old 01.09.2015, 11:50
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Re: How to structure the mortgage?

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Someone correct me if I am wrong, but I thought that one big benefit of splitting your mortgage is to avoid nasty refinancing surprises at the end of the period.

If you have a 1m chf mortgage with 10 year fixed and by the end of it, rates are at 5%, you will have to refinance the remaining amount at 5%, ouch.

If you have a 5 year and 10 year split, and rates are 5%, you only have to initially refinance half the remaining amount at the higher rate.

Of course, you could say that the ten year fix would be good in that case because you got the whole period at a low initial rate, but that was the way it was explained to me.

Of course, I'll wait for more experienced hands to comment on this.
If rates are 5% in 10 years time, it won't be a big surprise after 5/7/10, you should assume interest rates will be 5% or more. In the end after all the money printing inflation will come.
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