The fairy tale of the tax-saving mortgage

Would you pay someone CHF 18,000 to avoid paying someone else CHF 6000? I doubt it. You’d be CHF 12,000 worse off. Yet that’s exactly what you’re doing if you can afford to pay off your mortgage but choose not to because you’ve heard that it’ tax efficient.

Of course, it’s true that you must pay tax on the value (imputed rental value) of your home if you own it. So, the theory goes that if you keep your mortgage high you will pay less tax, which is based on this imputed value. But this doesn’t add up. And here’s why.

Using the abovementioned figures, let’s assume the tax man has calculated that the abovementioned imputed rental value of your place is CHF 18,000. That means if you rented it to someone, you’d get CHF 18,000 a year. If you have no mortgage, or had paid it off, you would now have to pay about CHF 6,000 in tax based on that value.

Let’s say you don’t want to pay CHF 6,000 in tax, so you decide to keep your mortgage at a level where you pay CHF 18,000 a year in interest to the bank, thus wiping out the imputed rental value and therefore the taxes.

It doesn’t take a rocket scientist to realize that you just gave the bank CHF 18,000 just so that you don’t have to pay CHF 6,000 to the tax man. Why would you do that?

Don’t just take my word for it, take a look at a recent article in the Tages-Anzeiger («Hypothek – abzahlen oder nicht?»- October 8, 2018^[1]). So where did this mortgage myth come from? Maybe from those with a vested interest: the banks?

It’s not black and white

So, is it always best to repay your mortgage? As usual, it depends on your circumstances. First, most of us need a mortgage to buy a house and it is nice to get a tax break. Or you may choose to finance consumption with debt as mortgage interest rates are usually lower than for a consumer loan. But that’s very risky. Or you may believe you can invest money in the financial markets and generate a higher return than the interest you pay on the mortgage. Again, this is very risky. Or maybe you need to build up your cash reserves for emergencies like house repairs. Last but not least, you might want to use your money to make extra contributions to your pension plan or pillar 3a. This has many advantages. You get a tax benefit in the year of the contribution and the investment is not subject to the Swiss wealth tax. And the returns are tax free until retirement.

Whatever you chose to do you now have all the facts to make an informed choice. Nevertheless, I recommend you talk to an independent financial advisor who can make sure your fairy tale has a happy ending

[1] «Hypothek – abzahlen oder nicht?»- Tages Anzeiger 8. Oktober 2018