Interest rates have been at rock bottom for close to ten years, so there’s never been a better time to borrow money.
The Swiss have long been known as the world’s biggest borrowers – on average, Swiss people hold more than CHF 100,000 in debt. This is because it is normally more tax-efficient to pay down your mortgage loan very slowly in Switzerland. This concept may be firmly entrenched in the Swiss psyche, but it can still be hard to get your head around.
So what is the tax impact of borrowing money ?
The interest you pay on a loan can be deducted from your taxable income. Take a couple with two kids and total annual income of CHF 250,000, for instance. They will be taxed at a rate of 40% even after deductions. This means that if they reduce their taxable income by CHF 10,000 through deductions, their tax bill will go down by CHF 4,000. A mortgage loan with an interest rate of 1% therefore actually only costs 0.6% once you factor in the deductions.
But just how worthwhile is borrowing money ?
This depends on three factors :
- Current interest rates
- The tax rate
- How you decide to invest the borrowed funds
Even at current interest rates, it’s not worth borrowing money if you’re just going to spend it or park it in a savings account that pays very little interest.
To really take advantage of today’s historically low interest rates, you have to invest the money. The couple above, for instance, would need to find an investment solution that delivers a return of more than 0.6%. This would cover the costs of the loan and allow them to make a profit on the investment.
What are the best types of investments to make ?
If you want to make the most of current interest rates, you have to think about how you could invest the money you borrow. Here are three particularly attractive options :
The first option is to use the money to build up your retirement savings by making additional voluntary payments into your occupational pension plan. This type of payment is tax-deductible and also helps to increase your pension coverage. If you’re interested in this option, we would strongly recommend that you seek advice from an expert, who can analyse your pension fund’s financial situation and draw up a tailor-made payment plan.
The second option is to invest in your home by borrowing money to maintain your property. Work done on your property is tax-deductible – and it’s also an opportunity to make your home more eco-friendly and save on your energy bill.
The third option is to borrow money to help your children get ahead in life. You could, for instance, take out a loan and donate the funds to your children so that they can buy their first home.
Lombard loans : the ideal solution
With a Lombard loan, you borrow cash by using your portfolio of securities as collateral. This is a much more flexible financing solution than a mortgage loan for several reasons. There is no long approval procedure, which means that the loan can be granted – and the funds disbursed – quickly. What’s more, these loans have short terms, so you can easily repay your loan if you need to, or simply roll it over. And unlike a mortgage loan, there is no need for a notary, which helps to keep the loan costs down.
Want to find out more? Contact our wealth advisory team.
