Indirect amortisation: definition
With indirect amortisation, you do not repay the capital to the bank immediately. Instead, you make regular payments into a pledged pension or savings product, which will be used to repay the mortgage at maturity.
The pension product is often a pillar 3a account or a tied life insurance policy, pledged in the bank’s favour. At the agreed maturity date, the capital accumulated in this product is used to repay a defined portion of the mortgage.
In Switzerland, mortgages are commonly structured in first and second rank. Indirect amortisation is frequently used to reduce the so-called “second-rank” portion of the mortgage, which must be brought down within a certain timeframe (typically 15 years or, at the latest, by retirement). Instead of reducing the mortgage directly each year, you build up capital within a pension framework, which will then be used in one or several payments to repay the amount required by the bank.
How indirect amortisation works
With indirect amortisation, your regular payments are split into two cash flows:
- mortgage interest, calculated on the total debt, which remains higher than in a direct amortisation scheme;
- savings contributions, paid into a pledged pension or savings product (pillar 3a, life insurance, possibly pillar 3b or another structured solution).
Unlike direct amortisation, your mortgage debt does not decrease over the years: for the portion concerned, it remains at its initial level. This means you pay interest on a higher amount for the entire duration of indirect amortisation. The main benefit is therefore tax‑related and linked to pension planning:
- mortgage interest stays higher and is therefore tax deductible for a longer period (subject to your canton’s tax rules and your personal situation).
- pillar 3a contributions are generally deductible from taxable income within the statutory limits, enabling additional tax optimisation.
- The capital saved within the pension framework may benefit from preferential taxation and, in principle, generate a return (interest, investment fund performance, profit participation from an insurance policy, etc.).
However, indirect amortisation also has drawbacks and risks:
- You remain highly leveraged for longer: the mortgage debt stays high, increasing your exposure if income falls, rates rise, or the property value declines.
- You depend on the performance of the savings product: if the pillar 3a solution or tied insurance delivers a lower‑than‑expected return, the accumulated capital may be insufficient to repay the full planned amount.
- If the rebuilt capital is too low, the bank may require additional collateral, extra amortisation, or an adjustment to the financing structure (for example, higher amortisation or a lower mortgage).
In summary, indirect amortisation can be attractive for homeowners who want to optimise taxes and strengthen retirement provision, while accepting to keep a higher level of mortgage debt for a long period. The choice between direct amortisation and indirect amortisation should always be assessed based on your personal situation, risk tolerance, and planning horizon (retirement, transfer, resale, etc.).
Example of indirect amortisation
Let’s imagine a mortgage of CHF 700,000 on a home in Switzerland. The bank requires CHF 200,000 to be amortised over 15 years to bring the debt down to CHF 500,000. You can choose between direct amortisation and indirect amortisation.
With direct amortisation, you would repay around CHF 13,300 of capital each year (CHF 200,000 ÷ 15). With indirect amortisation, the mechanism is different:
- The mortgage debt remains at CHF 700,000 for the full 15‑year period for the portion concerned;
- You pay interest on CHF 700,000;
- Instead of repaying CHF 13,300 directly to the bank, you pay CHF 13,300 each year into a pillar 3a account or a tied life insurance policy, pledged in the bank’s favour.
Assume:
- Mortgage interest rate: 2% per year;
- Annual payment within the indirect amortisation structure: CHF 13,300;
- Average pillar 3a return: 2% per year (simplified assumption).
- Interest cash flow
- Annual interest on CHF 700,000: 700,000 × 2% = CHF 14,000. Because the debt does not decrease, this interest remains roughly at the same level from year to year (in practice it can vary depending on rate movements and contractual terms).
- 2. Savings in pillar 3a
- Each year, you pay CHF 13,300 into pillar 3a.
- After 15 years, ignoring fees and assuming a 2% annual return, the final capital will be higher than the simple sum of contributions (15 × 13,300 = CHF 199,500).
- Thanks to the return, the accumulated capital could, for example, reach a little over CHF 215,000 (order of magnitude, the aim being to illustrate the compounding principle).
At the end of the 15 years:
- You use the pillar 3a capital (around CHF 200,000–215,000 in this example) to repay the CHF 200,000 required by the bank.
- The mortgage is then reduced from CHF 700,000 to CHF 500,000, as if you had amortised directly.
Several scenarios are possible:
If the product performs well:
The accumulated capital slightly exceeds CHF 200,000. You can repay the planned amount and potentially keep a small pension surplus (depending on the contract structure and tax conditions). You have benefited from tax optimisation (deducting interest and 3a contributions) and additional returns.
If performance is average :
The capital is close to CHF 200,000. You can repay the required amount, but there is little margin. You have still benefited from the tax deduction on 3a contributions and on mortgage interest, but the overall gain versus direct amortisation is more limited.
If the product has underperformed :
The available capital does not reach CHF 200,000, for example only CHF 170,000. In that case, CHF 30,000 is missing to reach the expected amortisation level. The bank may request:
– an additional payment (additional equity contribution),
– an adjustment to the mortgage structure,
– or another type of collateral
This example shows that indirect amortisation can combine mortgage financing, pension provision and tax optimisation, but it also involves risk linked to the return of the savings product and to maintaining a high level of debt throughout the period.
Guides related to amortisation
- Mortgage rate trends in 2026
- Amortisation direct or indirect
- Fixed-rate mortgage and indirect amortisation
