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 |
We believe that due to the marginal tax rate, the combined 3rd pillar interest covers an annual reduction in linear interest on the mortgage loan.
Articles on amortisation / life insurance
- Direct amortisation
- Indirect amortisation
- 3rd pillar bank deposit
- 3rd pillar insurance
- Linked 3rd pillar A
- Private 3rd pillar B
- Whole life insurance
- When rates are low, should we amortise more?