Amortisation / Life insurance

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Author : dl

When rates are low, should we amortise more?

Loan amortisation refers to the portion of capital that is paid back at the end of each period, for example quarterly. Mortgage loan debtors must reduce their commitments to 2/3 of the value of the property. But in absolute terms, is it a good idea to amortise?

In times of low interest rates, the answer is yes, because if the interest bill is light, it is possible to amortise a significant portion of the loan so that to the financial commitment decreases more quickly. This statement is even more valid in the event of in-fine amortisation, also known as indirect. The mechanism, which involves depositing funds into savings on restricted or unrestricted third pillar life insurance contracts, makes available substantial amounts, which are often guaranteed, to reduce the loan either at the rate’s maturity or at the age of retirement.

In fact, the principle of amortisation makes sense because by putting more into savings over time, the partial amortisation of the debt will be even more consistent and thus, in the event of higher rates at maturity, sudden increases in interest charges will be avoided. This brings us to another definition of the verb “to amortise”: to reduce shock.

Another argument in favour of amortisation is determined by the apparent lack of profitability of securities for the last several years. Today, holding a savings account that brings almost nothing in terms of revenue is not wise; it should be converted either into direct investment in real estate assets, or if the situation allows, even more wise would be into life insurance fund redemptions that will be used to amortise the loan in-fine while increasing life insurance coverage. The choice of such an option has a quadruple benefit: not only is sustainable debt interest charge tax deductible within permissible limits, but it also allows for profit from the performance of life insurance assets, which are certainly down, but close to mortgage interest rates. It also allows for significant tax deductions during the years of provision and in most cases, improves annuities for retirement, disability, widow or widower and surviving children.

Amortisation is a matter of balancing between the immediate cost of the debt based on the rates and its future cost. The mathematical probability that rates will be higher in the future is more important than the reverse. Therefore, if a mortgage debtor has the means to substantially amortise, it is in his or her interest to choose to reduce this debt to completion through third pillar life insurance contracts or LPP, whose maturity will generally occur at its age of reduction or at cessation of employment.

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