Annuity definition for your mortgage loan in Switzerland
An annuity is the amount you have to pay over one year for your mortgage loan, generally by adding interest and amortisation. In the Swiss context, it is mainly used to measure the actual or theoretical annual burden linked to your property financing.
Definition of an annuity in a mortgage loan
In a standard loan, an annuity often refers to a periodic payment made up of an interest component and a capital repayment component. As time goes by, the interest component decreases and the amortisation component increases, if the loan is structured with constant annuities.
In Switzerland, the structure is often different. A mortgage can be divided between 1st rank and 2nd rank, with interest paid separately and amortisation mainly required on the portion exceeding a certain financing limit. An annuity should therefore not be understood only as a fixed monthly payment, but as a total annual burden linked to your mortgage debt.
Annuity, interest and amortisation: what you actually pay
Your mortgage annuity can include several components. Interest represents the cost of the money borrowed. Amortisation, by contrast, is the gradual repayment of part of the debt. Depending on your situation, this amortisation may be direct, with a visible reduction in the debt, or indirect, for example through a pledged pillar 3a.
This distinction matters. Two property owners may have the same mortgage debt and the same interest rate, but a different annual burden if one amortises directly while the other uses indirect amortisation. In the second case, the debt often remains higher, but the savings built up in parallel can later be used to repay part of the mortgage.
Use our mortgage calculator to check your annuities.
Why the annuity affects your borrowing capacity
When a lender analyses your application, it does not only look at the negotiated rate. It also estimates whether your income allows you to sustain the mortgage burden over time. This burden may be calculated using a theoretical rate higher than the actual rate, in order to test your resilience to a rise in interest rates.
This is where the concept of annuity becomes strategic. An annuity that is affordable today with a low rate may become too heavy if interest rates rise, if your income falls or if you are approaching retirement. For this reason, it is useful to distinguish the actual annuity, based on your current conditions, from the assessment annuity used by the bank to evaluate risk.
Simple example of a mortgage annuity
Imagine a mortgage debt of CHF 600’000 with an interest rate of 2%. Annual interest amounts to CHF 12’000. If you also have to amortise CHF 10’000 per year, your effective annuity linked to the financing reaches CHF 22’000.
This amount does not necessarily correspond to the total cost of owning the property. You still need to take into account maintenance costs, possible condominium charges, future renovations, insurance and taxation. It is a frequent mistake to confuse the mortgage annuity with the full property budget.
