29Jan2015

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).

Direct amortisation
Mortgage interest gain	5,000	x	3	%	=	150
Tax loss due to the non-deductibility of interest on taxable income	150	x	35	%	=	52.50
Net gain on direct amortisation	150	-	52.50		=	97.50
Indirect amortisation
Cost of mortgage interest	5,000	x	3	%	=	150
Tax savings due to the deductibility of 3rd pillar payments	5,000	x	35	%	=	1,750
Net gain on indirect amortisation	1,750	-	150		=	1,600
Net annual savings due to 3rd pillar	1,600	-	97.50		=	1,502.50