What does amortization mean?

In Switzerland a distinction is made between first and second rank (first and second mortgages). The second rank covers the upper, riskier part of the financing and typically must be reduced within about 15 years or by retirement so that the LTV reaches roughly two-thirds of the relevant value. The first rank is often not necessarily required to be amortized, but it can be reduced voluntarily if liquidity and strategy allow.

There are two common ways to repay. With direct amortization you make regular payments on the mortgage, the debt falls immediately and so do future interest costs. With indirect amortization the mortgage remains constant; instead you pay into the tied retirement savings of Pillar 3a and pledge that balance to the bank. This preserves liquidity and can have tax effects depending on the legal situation; economically you build wealth in your pension savings while the nominal loan remains unchanged.

How much and how quickly you amortize is a strategic question. Higher amortization reduces interest costs and makes the financing more robust against market and life events, but it ties up liquidity that could otherwise be used for renovations, emergencies or investments. Many owners combine a scheduled repayment of the second rank with a buffer in an account or pension savings to remain flexible.

The timing and contract form also matter. A common approach is linear amortization with fixed annual or quarterly amounts. Additional special repayments (prepayments) are possible but must fit the chosen interest-rate commitment. With fixed-rate mortgages, extraordinary prepayments are often only possible without cost at the end of the fixed period or otherwise against compensation, whereas money-market–oriented models like SARON generally offer more flexibility. It's worth checking the contract terms before making any extra repayments.

A numerical example makes it tangible. If the purchase price is CHF 1,000,000 and the mortgage is 80 percent, that is CHF 800,000. The first rank is roughly two-thirds of the relevant value, so about CHF 667,000. The second rank of roughly CHF 133,000 is subject to amortization and would be repaid over fifteen years with about CHF 8,900 per year or just under CHF 740 per month. After that only the first rank remains; whether and how this is further amortized depends on budget, life planning and expected returns on alternative investments.