Why is a mortgage loan not fully repaid in Switzerland?

In Switzerland, it is common practice not to fully amortize a mortgage loan. This approach, which may surprise homeowners familiar with other systems, is based on specific financial and tax advantages within the Swiss framework.

How real estate financing works in Switzerland

When purchasing a property, buyers must provide at least 20% of the property's value as equity. The remaining 80% is financed by a bank in the form of a mortgage loan.

This loan is then divided into two parts:

• First-rank mortgage (66.67% of the property's value)
• Second-rank mortgage (the remaining 13.33%)

Swiss financial regulations, overseen by FINMA (Swiss Financial Market Supervisory Authority), require that the second-rank mortgage be repaid within 15 years. However, there is no obligation to amortize the first-rank mortgage, providing homeowners with greater financial flexibility.

Tax benefits

In Switzerland, mortgage interest payments are tax-deductible. The higher the loan, the greater the interest payments, which in turn increases the tax deduction and reduces the overall tax burden.

Additionally, homeowners must declare the imputed rental value of their property, which is a taxable notional income based on the property's value. Deducting mortgage interest helps offset this tax, making it financially advantageous to maintain mortgage debt.

Furthermore, renovation and maintenance expenses may also be deducted, further optimizing tax liabilities.

A profitable financial strategy

Not fully amortizing a mortgage allows homeowners to retain liquidity or invest their funds in potentially more profitable ventures, such as:

• Financial investments with returns higher than mortgage interest rates
• Purchasing additional real estate properties
• Retirement savings solutions (such as pillar 3a or voluntary contributions to the second pillar), which also provide tax advantages

In a low-interest-rate environment, this strategy becomes even more attractive, as borrowing costs remain low compared to potential investment returns.

Conclusion

Choosing not to fully repay a mortgage in Switzerland is a strategic decision that enables homeowners to:

✔ Optimize their tax situation
✔ Preserve liquidity
✔ Maximize wealth through other investments

However, this approach should be carefully evaluated based on personal financial and asset circumstances. A tailored financial analysis can help determine the best strategy according to individual goals and investment horizons.