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Direct and indirect mortgage amortization

19.06.2026

Amortization reduces your mortgage debt. You have the choice between direct and indirect amortization. The direct variant involves regular repayments to a lender. In the case of indirect amortization, the repayments are made to a pledged retirement savings account. We explain the advantages and disadvantages of these two options for owner-occupied private residential property.

At a glance

  • In Switzerland, only the second mortgage generally has to be amortized. It must be repaid within 15 years or by the time you retire at the latest. 
  • With direct amortization, you continuously reduce your mortgage debt. This lowers your interest costs, while at the same time reducing your tax deductions. 
  • With indirect amortization, you pay into a pledged retirement planning solution. The mortgage remains in place, but you can benefit from tax advantages. 
  • The type of amortization that makes sense depends on factors including income, assets, tax situation, investment behaviour and personal preferences.

Not sure which type of amortization is right for your situation? Our mortgage advisors will help you find the right financing solution and comprehensively assess tax and financial aspects.

Mortgage advice

When does a mortgage have to be amortized?

When you buy a property in Switzerland, you can finance (raise a loan on) a maximum of 80 percent of the property’s value with a mortgage. A loan-to-value ratio of up to two thirds of the property value is within the scope of the first mortgage. This amount doesn’t have to be amortized if evidence of affordability has been provided. A financing share between 67% and 80% corresponds to the so-called  second mortgage – for which an amortization obligation applies. 

By law, the amount taken out as a second mortgage must be repaid in full within 15 years or by the statutory retirement age at the latest. 

You can also amortize more than is required by law: if you’d like to gradually reduce your mortgage debt or pay it off in full, you can do so through voluntary amortization.

Infographic titled “Loan-to-value ratio”, showing the financing of a home and the structure of the mortgage over time. The lower part shows the equity capital (20%), along with a note indicating that a minimum of 10% must be cash without pension fund. Above that is the first mortgage (67%), shown as a large, continuous area. The second mortgage is at the top, shown as a stepped, tapering bar. This decreases gradually over a period of about 15 years and is marked “Amortization,” indicating the ongoing repayment. The financing limits are indicated on the left: a maximum of 80% debt capital and a minimum of 20% equity capital. The graphic visualizes the structure of the property financing and the mandatory reduction of the second mortgage over time.

Calculation example: amortization of 2nd mortgage

  • Purchase price/market value of the property: CHF 1,000,000
  • Equity capital (20%): CHF 200,000
  • Loan-to-value ratio (80%): CHF 800,000
  • 1st mortgage (67% of 1,000,000): CHF 670,000 
  • 2nd mortgage (13% of 1,000,000): CHF 130,000

Retirement > 15 years: CHF 130,000 : 15 = CHF 8,667 amortization per annum
Retirement in, for example, 10 years: CHF 130,000 : 10 = CHF 13,000 amortization per annum

What’s the difference between direct and indirect amortization?

A mortgage can be amortized directly or indirectly. “Directly” means you make regular payments to the lender and reduce your mortgage debt by the amortization amount. “Indirectly” means paying into a retirement planning solution under pillar 3a or a policy, which is used only when this solution is withdrawn to pay off the mortgage debt.

These two forms can also be mixed.

Indirect amortization vs. direct amortization

Infographic titled “Amortization and tax benefits”, which compares two models of mortgage repayment in Switzerland: direct and indirect amortization. Indirect amortization is shown on the left: the first mortgage remains constant (dark bar), while the second mortgage also remains in place (light area above it). Instead of repayments, annual payments are made into pillar 3a. Advantages: additional tax savings through 3a deposits and tax-free interest income. Disadvantage: the mortgage remains unchanged and accrues full interest. The graphic on the right shows direct amortization: the first mortgage remains stable, while the second mortgage decreases continuously over the years (sloping area). Advantages: lower mortgage debt and potential reduction in interest burden. Disadvantage: no additional tax savings. Between the two diagrams, an arrow points to “Amortization of 2nd mortgage”. The advantages and disadvantages of both models are listed in a table below. The axes show amounts of money (CHF) and time (years).

What is direct amortization?

With direct amortization, you repay the mortgage directly to the lender in regular intervals. This continually reduces your mortgage debt.

What are the benefits of direct amortization?

With direct amortization, the mortgage amount is reduced after every repayment. This means you pay less mortgage interest each time. So not only does your debt come down, but you also cut your monthly interest costs.

What is indirect amortization?

With indirect amortization, your repayments are not made to the lender, but instead initially to a pledged retirement planning solution. This could be a pillar 3a retirement savings account or fund-linked life insurance. The mortgage does not decrease during the amortization period. The lender uses this credit as collateral. Once the mandatory amortization is due (after 15 years or upon retirement), the retirement capital saved can be used to repay or reduce the mortgage debt. Indirect amortization is only possible for owner-occupied and private residential property. 

What are the benefits of indirect amortization?

In the case of indirect amortization, your mortgage debt and the interest paid on it always remain at the same level. The advantage of this option is that both payments into the retirement planning solution and the same mortgage interest can be claimed as deductions against taxable income. If you couldn’t otherwise afford a private pension (pillar 3a), take advantage of the tax allowances permitted under this option. And thanks to the additional security provided by the retirement capital, you may be offered better interest conditions for your mortgage. 

When are the various forms of amortization the best option?

There are many different factors involved in amortization planning. Besides tax optimization aspects, there’s also your personal approach to investment. Ask yourself the following questions, for example:

  • Should you invest any liquid assets in equities or other types of investment?
  • Would the free capital generate higher interest income than the mortgage interest that has to be paid? If so, then voluntary repayment of the mortgage isn’t worthwhile financially. 
  • Are the liquid assets being held in a bank account, or are they invested defensively (e.g. in government bonds)? In this case, you’d benefit more from the interest savings through amortization than from the yield on investments.  
  • Do you have enough money for both direct amortization and to pay into a private retirement planning solution under pillar 3a? In this scenario, direct amortization can sometimes be the better option. 
  • What level of debt is advisable in my financial situation? Consult a tax advisor regarding this question.

There are also psychological factors to consider: for some people, it is more important for their well-being to steadily reduce their debt and eliminate it entirely at some point than to optimize their finances and tax burden. 

Questions and answers

  • In this variant, the mortgage debt always remains the same, which means you don’t reduce your debt level. The mortgage interest charges always remain at the same level, too. In addition, payments into the 3rd pillar are also limited to the maximum amount set by law. If a higher level of amortization is required, a combination of direct and indirect amortization is recommended.

  • With indirect amortization, you can deduct all mortgage interest from your taxable income. Your capital and interest income in the retirement planning account used for indirect amortization is also exempt from tax. The taxes don’t have to be paid until the retirement assets are withdrawn (e.g. to repay the mortgage debt) – and even then at a reduced tax rate. 

  • From a tax perspective, reducing mortgage debt is generally unfavourable. You can deduct your mortgage interest in full from your income. If your interest costs fall, your tax liability rises. If you opt for direct amortization, you may not be able to afford contributions to a private retirement savings account (pillar 3a) and won’t enjoy the tax benefits this provides.

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