Amortization

Amortization (in British English: amortisation) is the process of repaying money owed on a loan (a mortgage, for example) either in full or in part.

More commonly, the term «pay off a mortgage» is used. The portion of the mortgage which you repay (amortize) is called the second mortgage.

A minimum of 2/3 (around 66%) of the collateral value of a mortgaged property must be amortized (according to Swiss Banking Guidelines of 2014). If the loan-to-value ratio is less than 2/3, the lender has no further obligation to amortize the mortgage. Otherwise, the mortgage will be subject to these amortization requirements:

  1. The amortization schedule (the length of time during which repayments must be made) cannot exceed 15 years.
     
  2. The first payment must be made no more than 1 year after the loan has been issued.
     
  3. Repayments must follow a pattern, meaning a set amount should paid in at regular intervals. Making very low repayments (or none at all) during the first part of the amortization schedule, and then compensating by making higher payments later on is generally not allowed.

In addition to limiting the amortization schedule to a 15 year maximum, banks and insurance companies typically require the mortgage to be fully amortized before the borrower’s 65th birthday (retirement age).

A differentiation is made between direct amortization and indirect amortization.

As a rule, a homeowner can choose to directly or indirectly amortize a mortgage on which less than 2/3 of collateral value is owed. A lender may choose to make further amortization payments to lower the interest payments on the remaining balance. Assets used to indirectly amortize a mortgage do not need to be directly deposited. These can, for example, be invested in a private pension fund (third pillar 3a).

More information:
Mortgages in Switzerland compared
First mortgage - simply explained
What is a loan-to-value ratio?
What is a second mortgage?
Direct Amortization - simply explained
Indirect Amortization - simply explained

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Expert Felix Oeschger
Felix Oeschger is an analyst and expert at moneyland.ch. He is responsible for several core topics.