Amortization (Indirect vs Direct)

In Switzerland, mortgage amortization comes in two forms: direct and indirect. Direct amortization pays down the mortgage principal directly, reducing debt over time. Indirect amortization keeps the mortgage debt constant while payments go into a pledged Pillar 3a account (or life insurance policy), which is used to repay the mortgage at maturity or retirement.

For 2026, Swiss law requires second mortgages (amounts above 65-67% LTV) to be amortized within 15 years OR by retirement age (whichever comes first). Direct amortization reduces debt linearly over 15 years. Indirect amortization via Pillar 3a offers significant tax advantages: contributions (up to CHF 7,258/year) are tax-deductible, saving 20-35% depending on canton and income (typically CHF 1,500-2,500/year). The Pillar 3a grows tax-free and is pledged to the bank as collateral. At retirement, the account is liquidated to repay the mortgage. Indirect amortization is usually more advantageous for higher earners due to larger tax savings, but it maintains higher debt longer and requires disciplined investing. Direct amortization provides peace of mind with decreasing debt.

Real-World Example If Anna has a CHF 200,000 second mortgage requiring CHF 13,333/year amortization (15 years). Direct: she pays CHF 13,333 to reduce mortgage debt. Indirect: she contributes CHF 7,258 to Pillar 3a (tax-deductible, saving ~CHF 2,000 at 28% rate) and CHF 6,075 to the mortgage, maintaining debt at CHF 200,000. After 15 years with 4% returns, her Pillar 3a is ~CHF 145,000, plus remaining mortgage payments cover the CHF 200,000 debt.