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Old 06.03.2020, 11:59
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Mortgage for Dummies: Basic Question

I am very much a beginner in mortgages, and there is a question bugging me, which looks however very silly: Does one actually pay back the "whole" amount of the borrowed mortgage money? :-/

Assume for a property of 900K CHF, you put a downpayment of 180K and the bank gives you a mortgage of 720K with an interest rate of 1%.

Annually, you pay the interest rate plus the maintenance fee of 1% the property value, totaling 7200+9000=16200 CHF

But you should also pay off the "origin" amount as well, no? I read that banks require you to pay off one-third of the loan amount in 15 years (or any mortgage duration?), in installments called "amortizations". Your downpayment is first deducted from that one-third. So annually you also pay (240000-180000)/15=4000 CHF towards the original loan.

Now, what happens at the end of the 15 years? You still owe the money, no? What people normally do? Re-mortgage (What's that btw)?

Sorry if it looks silly. Where I come from, a "property loan" is like any other loan and you pay it off completely plus interest in a certain number of installments (e.g. 20 years)

Last edited by higgsboson; 06.03.2020 at 14:35.
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Old 06.03.2020, 12:24
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Re: Mortgage for Dummies: Basic Question

you take a mortgage with a certain fixed interest period, like 15 years in your case. After these 15 yrs you renegotiate with the bank and take another fixed interest period, or you move your mortgage to another bank if their deal is better, or you pay off the debt if you please.
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Old 06.03.2020, 12:32
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Re: Mortgage for Dummies: Basic Question

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you take a mortgage with a certain fixed interest period, like 15 years in your case. After these 15 yrs you renegotiate with the bank and take another fixed interest period, or you move your mortgage to another bank if their deal is better, or you pay off the debt if you please.
Well that's one way, in part... but...

In general, within CH the mortgage system is quite different from most other countries, most notably because for a large part of the borrowed cash there is no expectation of repayment, ever.

Most often the ratio will be 20% cash deposit, 15% repayment mortgage (i.e. you pay off the capital+interest over a set period of time, normally 15 years) and the remaining 65% on an interest-only basis, often, these days, with fixed interest rates for a given period, from one year upwards, which is renegotiated when that period expires.

This 65% portion is set to roughly equivalence the tax you'll pay on assumed rental income, which you then get back on the interest paid. And in many ways it's just like paying rent to the bank. When you die the debt and mortgage can be passed on as part of your estate, so this can continue for several generations.
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Old 06.03.2020, 12:42
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Re: Mortgage for Dummies: Basic Question

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Well that's one way, in part... but...

In general, within CH the mortgage system is quite different from most other countries, most notably because for a large part of the borrowed cash there is no expectation of repayment, ever.

Most often the ratio will be 20% cash deposit, 15% repayment mortgage (i.e. you pay off the capital+interest over a set period of time, normally 15 years) and the remaining 65% on an interest-only basis, often, these days, with fixed interest rates for a given period, from one year upwards, which is renegotiated when that period expires.

This 65% portion is set to roughly equivalence the tax you'll pay on assumed rental income, which you then get back on the interest paid. And in many ways it's just like paying rent to the bank. When you die the debt and mortgage can be passed on as part of your estate, so this can continue for several generations.
The only issue is you will be subject to affordability checks come remortgage, if you have retired it's quite possible that you won't be able to borrow as much so need to either pay down a huge chunk of the mortgage or sell the property asap.

Same issue at death if the wife / children can't afford the mortgage payments previously paid by the husbands pension.
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Old 06.03.2020, 12:52
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Re: Mortgage for Dummies: Basic Question

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The only issue is you will be subject to affordability checks come remortgage, if you have retired it's quite possible that you won't be able to borrow as much so need to either pay down a huge chunk of the mortgage or sell the property asap.

Same issue at death if the wife / children can't afford the mortgage payments previously paid by the husbands pension.
Good point. But of course in that scenario the tax benefits also disappear, as the rebates are only going to be available on tax that's actually due on your income. So there's no reason to want to continue the mortgage, unless you simply don't have enough cash to pay it off

I've always worked on the basis that I've needed to ensure we're saving or otherwise accumulating (e.g. from fully paying off another house loan) enough capital so that the 65% mortgage could be paid off as and when required. At the moment my wife's still in full time employment and there's a modest income from rentals, so no need to worry about it just now, but certainly it's a part of the calculation for the long-term future.
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Old 06.03.2020, 13:54
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Re: Mortgage for Dummies: Basic Question

Depends on the bank. We have over 50%* equity in our home. The bank is happy to accept interest only. I’m nor certain what maintenance fees are, but we don’t pay them.

*Our mistake, I wasn’t a tax payer at the time we took out the mortgage.
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Old 06.03.2020, 14:03
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Re: Mortgage for Dummies: Basic Question

Hi HiggsBoson


Another tip, is to split your mortgage into separate chunks. Previously this was to be able to have separate mortgages with different interest rates and timescales.



Also Swiss mortgages normally don't allow capital repayment during the period of the mortgage.



Now with the interest rates being almost the same, you would have your mortgages for different timescales. The advantage of these chunks, could be able to have your mortgage with different banks, and when each mortgage expires, then you have the option of paying off some of the capital.


For example, 600,000 house, 200,000 cash + 400,000 mortgage
200,000 for 7 years ( num 1 )

100,000 for 5 years ( num 2 )

100,000 for 2 years ( num 3 )



After 2 years, ( num 3 ) expires repay 50,000
50,000 for 5 years ( num 4 )

After another 3 years, ( num 2 ) expires, repay 100,000
After another 2 years, ( num 1 and 4 ) expires, 250,000 remaining capital.
Start again ......



Good luck with your house hunting.
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Old 06.03.2020, 14:43
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Re: Mortgage for Dummies: Basic Question

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Hi HiggsBoson


Another tip, is to split your mortgage into separate chunks. Previously this was to be able to have separate mortgages with different interest rates and timescales.



Also Swiss mortgages normally don't allow capital repayment during the period of the mortgage.



Now with the interest rates being almost the same, you would have your mortgages for different timescales. The advantage of these chunks, could be able to have your mortgage with different banks, and when each mortgage expires, then you have the option of paying off some of the capital.


For example, 600,000 house, 200,000 cash + 400,000 mortgage
200,000 for 7 years ( num 1 )

100,000 for 5 years ( num 2 )

100,000 for 2 years ( num 3 )



After 2 years, ( num 3 ) expires repay 50,000
50,000 for 5 years ( num 4 )

After another 3 years, ( num 2 ) expires, repay 100,000
After another 2 years, ( num 1 and 4 ) expires, 250,000 remaining capital.
Start again ......



Good luck with your house hunting.
Splitting mortgage is not a good idea. This was discussed extensively in this forum. In short, if you split with the same bank, you are very much tied to renew the expiring part with the same bank. So, almost no flexibility to change the bank with a better conditions.
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Old 06.03.2020, 15:16
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Re: Mortgage for Dummies: Basic Question

To split, or not to split, to pay down, or not to pay down... these are all decisions based on individual circumstances and goals.

Run a few different scenarios based on your situation now and a conservative expectation of your financial situation in X, Y, or Z years. Look at not only mortgage payments, interest, taxes, but also opportunity costs. Factor in your own personal feeling about debt and most importantly how long you will likely be in Switzerland. This kind of exercise should give you an idea of how to structure your mortgage in the way most beneficial to you in the short and long term.

FWIW, taking all the above into account we chose to structure our mortgage in tranches, and chose to pay off all but a small tranche. We keep that open only to keep the Schuldbrief alive to facilitate selling if/when we ever do so. For us, US citizens livinging in the Steuerparadis, there was no real tax advantage in keeping a mortgage.

But this is a big ol' heap o' YMMV.

Good luck with the property purchase!
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Old 06.03.2020, 17:38
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Re: Mortgage for Dummies: Basic Question

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This 65% portion is set to roughly equivalence the tax you'll pay on assumed rental incomm...
Not at 1% interest it isn't.

Anyway that whole argument is largely a fallacy promoted by the banks to keep people borrowing from them on safe loans. Somehow people seem unable to realise that every CHF 100 they pay in interest is saving them perhaps CHF 30 in tax so they're CHF 70 down on the deal. The real reason to keep the mortgage up is that it is a cheap source of lending for funds that you perhaps can earn more with (shares or whatever) than you pay the bank.
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Old 06.03.2020, 18:38
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Re: Mortgage for Dummies: Basic Question

Just to explain in simple terms to the OP my experience. I got mortgage back in 2005 - variable rate, which worked out quite nicely. There were two portions. The portion above 66% of the house value had a higher interest than the bit below. The higher bit had amortisation built in - obligatory.

In 2010, my contract expired, so I got a new mortgage with a different lender, This time I got 4 fixed rate mortgages with different lengths and different rates. The amortisation was added to the longest. As the mortgage contracts ended, I paid them off.

I'm now down to one fixed rate mortgage (just renewed for 10 years), but the amortisation has been removed. I'll keep that until I sell the house.

Maintenance costs have been rather less than 1% - that's with a new kitchen, boiler, windows, shutters....
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Old 06.03.2020, 18:56
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Re: Mortgage for Dummies: Basic Question

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Not at 1% interest it isn't.

Anyway that whole argument is largely a fallacy promoted by the banks to keep people borrowing from them on safe loans. Somehow people seem unable to realise that every CHF 100 they pay in interest is saving them perhaps CHF 30 in tax so they're CHF 70 down on the deal. The real reason to keep the mortgage up is that it is a cheap source of lending for funds that you perhaps can earn more with (shares or whatever) than you pay the bank.
yeah. never understood the logic when someone told me that it was great to pay interest of 100 to save tax of 30...
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Old 06.03.2020, 19:46
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Re: Mortgage for Dummies: Basic Question

In regards to this, can someone explain the advantage of buying a house? Since it seems that you never really own it, and if you move (assume that you cant rent it out for some reason), you have to sell it to pay back the mortgage.
Like the OP, i also come from a country were you pay off the full amount in 30 years.
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Old 06.03.2020, 20:09
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Re: Mortgage for Dummies: Basic Question

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yeah. never understood the logic when someone told me that it was great to pay interest of 100 to save tax of 30...
Better than paying 100 towards rental and not getting any tax saving at all?
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Old 06.03.2020, 20:14
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Re: Mortgage for Dummies: Basic Question

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In regards to this, can someone explain the advantage of buying a house? Since it seems that you never really own it, and if you move (assume that you cant rent it out for some reason), you have to sell it to pay back the mortgage.
Like the OP, i also come from a country were you pay off the full amount in 30 years.
Well, nobody stops you from paying off the mortgage...
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Old 06.03.2020, 20:50
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Re: Mortgage for Dummies: Basic Question

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In regards to this, can someone explain the advantage of buying a house? Since it seems that you never really own it, and if you move (assume that you cant rent it out for some reason), you have to sell it to pay back the mortgage.
Like the OP, i also come from a country were you pay off the full amount in 30 years.
My mortgages costs are a fraction of the rental paid on neighbouring houses. In addition to the tax savings from the mortgage I can write off much of the costs of ‘improvements’!
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Old 06.03.2020, 22:16
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Re: Mortgage for Dummies: Basic Question

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My mortgages costs are a fraction of the rental paid on neighbouring houses. In addition to the tax savings from the mortgage I can write off much of the costs of ‘improvements’!
Thanks. So you are convinced that was the "most efficient" use of your downpayment money, instead of investing it elsewhere for example?

I assume place to rent ratio in your neighbourhood also plays a role. No?
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Old 06.03.2020, 22:20
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Re: Mortgage for Dummies: Basic Question

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My mortgages costs are a fraction of the rental paid on neighbouring houses. In addition to the tax savings from the mortgage I can write off much of the costs of ‘improvements’!
Currently interest rates are unusually low, you should not assume that this will continue low for the rest of your life. Swiss mortgage rates were around 7% in the early 90's.
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Old 06.03.2020, 22:46
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Re: Mortgage for Dummies: Basic Question

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In regards to this, can someone explain the advantage of buying a house?
1/4 of the monthly payment?

Tom
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Old 06.03.2020, 23:40
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Re: Mortgage for Dummies: Basic Question

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In regards to this, can someone explain the advantage of buying a house?
The security of knowing the ground beneath my feet is mine. My life in Switzerland is largely temporary, fleeting, ephemeral, rootless. Owning my home provides an illusion of stability.

That, and the fact that the quarterly mortgage is less than the price of a semi-decent dinner out, while rent was up there in the stratosphere.
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