Pledging assets as collateral: definition

Pledging assets as collateral means offering an asset (for example a pension account, securities or cash) to your bank as security, without transferring ownership immediately. If you default on your mortgage payments, the lender can realise this collateral to cover the outstanding debt.

Pledging assets as collateral in the context of a mortgage

In mortgage financing, mortgage collateral can be an alternative to withdrawing your pension assets or savings. Instead of withdrawing these funds permanently, you keep them invested and use them as additional security to obtain or top up your mortgage.

In practice, the bank assesses the value of the pledged asset (for example a 3rd pillar account, an investment portfolio or cash) and may agree to lend you more or to offer better conditions on your mortgage, because its risk is reduced. You remain the owner of the pledged asset, but you can no longer dispose of it freely as long as the pledge is in place.

Pledging assets as collateral: definition and practical workings

From a practical point of view, pledging assets as collateral is based on a pledge agreement that you sign with the bank. This document specifies which assets are pledged, for what amount and under which conditions the bank may realise them. As long as you meet your obligations (payment of interest and, where applicable, amortisation), the pledge remains purely theoretical: your assets stay invested and continue to generate interest or returns.

However, if you can no longer meet your obligations, the bank can use the value of the pledged asset to repay all or part of the mortgage debt. This is precisely what reassures the lender and, in some cases, allows it to accept a higher level of financing or a higher loan-to-value ratio.

Pledging pension assets (2nd pillar and 3rd pillar)

In Switzerland, pledging is often used with pension assets: 2nd pillar (LPP/BVG, which in some cases you can withdraw to buy your home) and the tied 3rd pillar. Rather than withdrawing your pension fund capital or your 3a account, you can pledge these assets to supplement the equity required by the bank. This allows you to preserve your retirement savings while increasing your borrowing capacity.

This solution is attractive if you have substantial pension assets but want to limit tax consequences and the loss of retirement benefits. The assets remain within the pension system and in principle continue to generate future pension rights; in return, you accept that the bank may realise them if your situation deteriorates and the sale of the property does not fully repay the debt.

Advantages and risks of pledging assets as collateral

Pledging assets as collateral offers several advantages for you as a borrower. It may allow you to buy a property with less cash equity, increase your purchasing power on the property market and sometimes obtain better interest conditions thanks to the additional security given to the bank. If the pledge involves pension assets, you also avoid an immediate withdrawal of these funds, which can be beneficial for your retirement.

On the other hand, this strategy also entails risks. In the event of financial difficulties, it is not only the property that is at risk, but also the pledged asset (pension assets, securities, savings). A downturn in the financial markets can reduce the value of the pledged investments without reducing your mortgage debt. It is therefore essential to assess, together with your adviser, the overall impact of pledging on your wealth and your long-term financial security.

Pledging or amortising: how to decide?

When you pledge an asset (for example your 3rd pillar), you may in some cases be able to reduce the direct amortisation of your mortgage. Instead of repaying the principal quickly, you accept a higher level of debt secured by the pledge. This can ease your budget in the short term, but means paying mortgage interest on a higher amount for a longer period.

The choice between pledging and amortising depends on your priorities: if you favour security and the gradual reduction of your debt, higher amortisation will often be recommended. If, on the contrary, you want primarily to optimise your tax situation (interest deduction) and keep your pension assets invested, pledging can be a relevant option, provided you fully understand and accept the associated risks.

Concrete example of pledging assets to finance a property

Imagine you want to buy an apartment and the bank requires 20 % equity. You have 10 % in cash and 10 % in a 3rd pillar pension account. You have two options: withdraw the 3rd pillar or pledge it. By choosing to pledge, you keep your 3rd pillar intact, but it serves as additional collateral for the bank to reach the required equity contribution.

In practice, the bank grants the loan taking into account the value of the pledged 3rd pillar. You pay mortgage interest on the full amount borrowed, while your 3rd pillar continues to receive contributions and to grow. However, if one day you can no longer cover your expenses and the sale of the property does not fully repay the debt, the lender may, as a last resort, use the pledged assets to make up the shortfall.

Useful resources on pledging assets as collateral

• Better understand mortgage financing in Switzerland
• Is it possible to become a homeowner with a minimum amount of equity?
• How much can I borrow (borrowing capacity)?