In Brief (TL;DR)
Using your severance pay (TFR) to pay off your mortgage is a major financial decision that requires a careful analysis of the pros and cons.
The answer isn’t straightforward and depends on a careful cost-benefit analysis, comparing the savings on mortgage interest with the potential returns of the TFR.
Finally, we analyze the key factors for an informed choice, such as the TFR’s return and the savings on interest payments.
The devil is in the details. 👇 Keep reading to discover the critical steps and practical tips to avoid mistakes.
Homeownership is a cornerstone of Mediterranean culture and a key milestone for many Italians. But once the mortgage flame is lit, another question naturally arises: how to get out of debt as quickly as possible? One of the most considered options is using the Trattamento di Fine Rapporto (TFR), or severance pay. This choice, halfway between tradition and financial innovation, deserves careful analysis. Paying off a mortgage with severance pay can be a psychological and financial relief, but is it really the wisest move for your financial future? The answer isn’t universal and depends on a careful assessment of personal, regulatory, and market variables.
Before making such an important decision, it’s essential to fully understand the mechanisms governing TFR advances, compare the immediate benefits with long-term growth opportunities, and analyze the current economic context. This article aims to be a guide for navigating the pros and cons of this choice, offering practical insights and concrete scenarios to help you make an informed decision.
What is TFR and How Does the Advance Work
The Trattamento di Fine Rapporto, also known as severance pay, is a sum of money that accrues during an employee’s working life and is paid out upon termination of the employment relationship. It is essentially a form of deferred salary. However, the law allows for a portion to be requested in advance for specific needs, including the purchase of a primary residence. To access this option, you must have at least eight years of service with the same employer. The maximum amount you can request is 70% of the TFR accumulated up to that point. It’s important to note that this request can only be made once during the employment relationship.
However, the regulations set clear limits. The advance is granted for the purchase of a primary residence for oneself or one’s children, not for paying off an existing mortgage. A ruling by the Court of Cassation clarified that paying off a pre-existing loan is not among the reasons provided for in Article 2120 of the Civil Code. However, some collective bargaining agreements or individual agreements with the employer may provide more favorable conditions, allowing for this possibility. It is therefore crucial to check what your National Collective Labor Agreement (CCNL) stipulates before proceeding.
The Advantages of Using TFR to Pay Off Your Mortgage
The most obvious benefit of paying off a mortgage early is the savings on interest payments. Closing the loan before its natural expiration means no longer having to pay the bank the interest portion scheduled for the coming years. These savings can be substantial, especially if the mortgage was taken out during a period of high interest rates or if there are still many years left until it’s paid off. Getting rid of the bank debt also offers undeniable psychological relief. No longer having to worry about the monthly payment increases financial peace of mind and frees up economic resources that can be allocated to other projects, investments, or simply to improve one’s standard of living.
Another positive aspect is the increase in your monthly cash flow. Without the mortgage payment, you have more liquidity available each month. This money can be used to build a new emergency fund, increase your investments, or cover other important expenses. In a way, you transform “frozen” capital (the TFR) into immediate financial freedom. For those approaching retirement, paying off the mortgage can mean entering this new phase of life without the burden of a major debt, ensuring greater financial tranquility on a typically lower income.
The Disadvantages and Hidden Costs
Using your TFR to pay off a mortgage also has significant disadvantages that must be carefully weighed. The first is giving up the revaluation of the TFR itself. By law, TFR left with the company is revalued annually at a fixed rate of 1.5% plus 75% of the inflation rate. This mechanism protects the capital from the erosion of purchasing power and ensures steady growth over time. Forgoing this revaluation for future years means losing a secure, legally guaranteed return. It’s an opportunity cost not to be underestimated, especially in periods of high inflation.
Another crucial factor is the preferential tax treatment applied to the advance. If requested for the purchase of a primary residence, the amount is subject to a 23% substitute tax. Although more favorable than the ordinary taxation applied at the time of final payout (which starts at a minimum rate of 23%), it is still an immediate cost to bear. Finally, using the entire TFR means giving up an important safety cushion for the future. The severance pay is intended as financial support at the end of one’s career or in case of job loss. Playing this card early could leave you exposed to future unforeseen events or reduce the resources available for retirement.
A Mathematical Comparison: TFR Return vs. Interest Savings
The decision of whether or not to use your TFR to pay off a mortgage often comes down to a calculation of financial convenience. On one hand, we have the cost of the mortgage, represented by the Annual Percentage Rate (APR), which includes all the loan’s charges. On the other, the return on the TFR, which, if left with the company, is equal to a fixed 1.5% plus 75% of the inflation rate. If the mortgage’s APR is significantly higher than the expected net return of the TFR, early repayment is mathematically advantageous. For example, with a 4% mortgage and an estimated TFR return of around 2.5-3%, paying off the debt generates a net saving.
However, the picture gets more complicated if the TFR has been allocated to a pension fund. In this case, the return depends on the chosen investment strategy (bond, balanced, equity) and can potentially be much higher than the one guaranteed by the company. If the pension fund’s return, net of costs and taxes, is higher than the cost of the mortgage, then divesting to pay off the loan would be an economically disadvantageous choice. You would be giving up a higher return to save on a lower cost. It is therefore essential to compare the APR of your mortgage with the real or expected net return of your TFR, wherever it is allocated.
Alternatives to Consider Before Using Your TFR
Before tapping into your severance pay, there are other ways to lighten the mortgage burden. Refinancing (known as ‘surroga’ or portability in Italy) allows you to transfer your mortgage to another bank that offers better terms, such as a lower interest rate, at no cost. This can significantly reduce the monthly payment amount or the overall loan term. Another option is renegotiating with your current bank to try to obtain more favorable contract terms. Although the bank is not obligated to accept, a good relationship and a history of timely payments can work in the customer’s favor.
Another strategy is partial prepayment of the mortgage. Instead of using the entire TFR, you could consider using other savings or extra cash to pay down a portion of the remaining principal. This move allows you to choose whether to reduce the payment amount or shorten the amortization schedule, while keeping the TFR as a resource for the future. For those with a variable-rate mortgage who fear future rate hikes, considering a switch to a fixed rate could be a prudent move to ensure a stable payment and better plan your finances. Finally, for those in difficulty, there are solidarity funds (like the Gasparrini Fund) that allow you to suspend payments for a certain period.
Conclusions
In conclusion, using your TFR to pay off a mortgage is a complex decision with significant financial and personal implications. There is no one-size-fits-all answer, but rather a choice that must be carefully weighed based on your specific situation. Current regulations, in principle, do not allow a TFR advance for the sole purpose of paying off an existing mortgage, but they do allow it for the purchase of a primary residence. It is therefore crucial to check for exceptions provided by your collective bargaining agreement or any individual agreements.
The assessment must balance the immediate relief of eliminating the debt with the long-term benefits of the TFR’s revaluation or the returns from a pension fund. A comparative analysis between the cost of the mortgage (APR) and the return on your TFR is the essential starting point. If the debt costs more than the return, the operation can be worthwhile. Otherwise, you risk making a financially disadvantageous choice. Considering alternatives like refinancing or renegotiation is always good practice before touching a capital sum so important for your retirement future. The final choice should aim for a balance between present security and future peace of mind.
Frequently Asked Questions
Can I request a TFR advance to pay off my primary residence mortgage?
According to general regulations (Article 2120 of the Civil Code), a TFR advance can be requested for the “purchase of a primary residence for oneself or for one’s children,” but not explicitly to pay off an existing mortgage. Case law has interpreted this rule restrictively, denying the right to an advance for this specific purpose. However, it’s possible that collective bargaining agreements (CCNL) or individual agreements between the employee and employer may provide more favorable conditions, extending this possibility. Therefore, it is essential to first check your CCNL or discuss it directly with your company.
What are the requirements to request a TFR advance?
To be able to request a TFR advance, the employee must meet certain minimum requirements set by law. The main one is having at least eight years of service with the same employer. The maximum amount that can be requested cannot exceed 70% of the severance pay accrued up to that point. The request must be justified by specific reasons, such as the purchase of a primary residence or extraordinary medical expenses. The advance can be requested only once during the entire employment relationship. Companies, in turn, fulfill requests within annual limits (10% of eligible employees and 4% of the total number of employees).
What is the tax on a TFR advance for a primary residence?
A TFR advance requested for the purchase or renovation of a primary residence enjoys a favorable tax regime. A 23% withholding tax is applied to the amount disbursed. This rate is fixed and replaces the ordinary IRPEF income tax, which would be applied at the time of the final TFR payout at the end of a career (with brackets starting at 23%). If the TFR is instead contributed to a pension fund, the tax on an advance for a primary residence is even more advantageous, with a 23% rate that decreases by 0.30% for each year of participation in the fund after the fifteenth year, down to a minimum of 9%.
Is it better to leave the TFR with the company or in a pension fund?
The choice depends on the employee’s financial goals and risk tolerance. TFR left with the company offers a legally guaranteed return, equal to a fixed rate of 1.5% plus 75% of the inflation rate (ISTAT consumer price index). It is a safe and protected choice. Allocating the TFR to a supplementary pension fund, on the other hand, opens up the possibility of potentially higher returns, but these are tied to the performance of financial markets. Pension funds offer different investment lines (from more conservative to more aggressive) and a tax advantage on both returns (taxed at 20% instead of 26% on most financial instruments) and final benefits. From a long-term perspective, a pension fund often has the potential to generate greater capital growth.
What happens if I have an ongoing salary-backed loan?
The presence of a salary-backed loan can complicate the request for a TFR advance. Often, the accrued TFR is used as collateral for the loan. If the TFR is pledged as collateral for the loan, it will not be possible to get an advance until the loan is paid off. If, however, the TFR has not been fully pledged, it might be possible to get an advance on the unencumbered portion, but this requires authorization from the financial company that issued the loan and the associated insurance company. In practice, the ability to access the advance depends on the specific contractual agreements of the salary-backed loan you have.
Frequently Asked Questions
It’s mainly worthwhile when the mortgage interest rate is significantly higher than the net return on the TFR. If the savings on mortgage interest payments exceed the revaluation you’re giving up (1.5% fixed plus 75% of inflation), the move is advantageous. It’s a choice to consider, especially if you are in the early years of the amortization plan when the interest portion of the payment is larger.
Yes, the law allows you to request a TFR advance for the purchase of a primary residence for yourself or your children. However, you must provide the employer with all the documentation proving the transaction, such as the deed of sale and the mortgage contract in your child’s name.
The TFR advance for the purchase of a primary residence can be requested only once during the same employment relationship. This limitation is in place to protect both the company’s financial stability and the final amount due to the employee.
A favorable tax rate applies to a TFR advance requested for the purchase or renovation of a primary residence. It is a 23% withholding tax, which is generally more advantageous than the ordinary IRPEF income tax rate that would be applied to your salary.
Yes, the company can deny the request. The law states that requests must be met annually within the limit of 10% of eligible employees and, in any case, 4% of the total number of employees. For companies with fewer than 25 employees, granting the advance is at the employer’s discretion.
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