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Swiss real estate owners are currently focusing on the upcoming meetings of their central banks. The US Federal Reserve and the European Central Bank (ECB) will discuss next week whether to continue raising interest rates. A week later – on June 22 – the Swiss National Bank (SNB) Board of Directors decides on the key interest rate, which has stood at 1.5 percent since the last increase in March.
“We assume that the SNB will raise the base rate by 0.25 percentage points in mid-June. This is to send a signal to fight hyperinflation,” predicts mortgage specialist and Oxifina’s chief executive Giampiero Brundia to cash.ch. By mid-2024, inflation will not move quickly and clearly towards or below 2 percent. Headline inflation fell significantly in Switzerland, but core inflation (excluding energy prices) remained stubbornly above 2 percent.
On the other hand, Avobis Research Head Burak Er is more pessimistic: “We think that an increase of 50 basis points is possible despite the pleasing development in inflation in May.” This is due to the risk of inflationary volatility that may arise from adjusting the mortgage reference rate. The inflation rate has also been very high by Swiss standards for the past year and a half, and must therefore be tackled with all monetary policy tools.
Restrictive attitude of banks
Contrary to expectations, this persistent expectation of an increase in interest rates has not really moved the mortgage market in recent months. The residential real estate interest rate index on the comparison portal Hypotheke.ch has mostly moved sideways since the beginning of the year and is now at 2.58 percent. The high of just under 2.9 percent compared to October last year is currently unreachable despite the rise in key interest rates in Switzerland.
Mortgage interest rates have remained stable on average since the beginning of the year, although they are characterized by significant fluctuations and large differences in the published interest rates of different providers. Asked by Cash.ch, he said, “It’s surprising that this has happened despite the decline in federal bond yields that underpin mortgage interest rates.” The yield on 10-year federal bonds, which was 1.565 percent at the beginning of the year, is now down 61 basis points to 0.953 percent.
Reason: Banks transfer the high risk margins they encounter in the swap market to their customers. Due to the current uncertainties in the banking sector, these margins remain high. “Interestingly, swap margins increase at the long end of the yield curve, while banks soften a bit when setting mortgage rates for different maturities, so the mortgage yield curve is pretty flat,” says Er.
Not profiting from falling market interest rates
In addition, the restrictive attitude of banks is also reflected in the increasing credit margins. This is likely to remain so for the time being and depends on future economic developments and the stability of the financial system. As a result, mortgage borrowers who now opt for fixed-rate mortgages won’t be able to take advantage of falling market interest rates as quickly as they used to.
In this context, it can also be stated that federal bond yields are now almost excessively low. The reason for this is the high demand from investors who want to invest in the safe franc. Since Switzerland also has a low level of debt by international comparison, the supply of premium federal bonds is correspondingly low. If demand increases with the strong Swiss franc, the yields on Swiss Confederation bonds will fall accordingly.
Flat mortgage rate curve remains
Therefore, the SNB’s final interest rate decision on June 22 is likely to have direct ramifications primarily for Saron mortgage holders, as the Saron rate follows interest rate action at a 1:1 ratio. Avobis’ head of research assumes that the key interest rate will reach 2 percent by the September meeting at the latest and the SNB will hold it at that level.
“After the rate hike, Saron mortgages are likely to become more expensive than fixed-rate mortgages, depending on the rate step,” he warns. In the Brundia scenario, the Saron mortgage becomes even more expensive: plus 0.25 to 0.50 percentage points per year. On the other hand, he expects the 10-year fixed rate mortgage to move sideways with fluctuations of 25 basis points in both directions.
The more optimistic the SNB’s disinflation outlook is, the more likely it is that long-term interest rates will move lower overall. “However, due to the increased risk environment, mortgage lenders will benefit little from this development, as risk premiums are likely to remain high or even increase.” As a result, a stable, flat mortgage yield curve is likely to remain in place, with at most a slight reversal on the short end, until risk in the financial sector subsides.
Saronic mortgage as a bridge
The starting position for Swiss real estate owners isn’t easy: either accept a further increase in interest costs with a Saron mortgage or opt for a flat rate mortgage too soon.
“If less than 2 percent flat rate mortgages are available, we recommend using flat rate mortgages,” says Brundia. If the interest rate quote isn’t correct—well over 2 percent—then he recommends bridging the current stage with a Saron mortgage. But later, when interest rates drop, you should switch to a fixed-rate mortgage. Because these are likely to become cheaper in the next two to three years with falling inflation and the approaching recession.
From Avobis he sees this right away: “It may make sense to choose a Saron mortgage right now, given the current market situation and the individual mortgagee’s individual situation.” But at a later time, when conditions are more favorable, long-term financing should be considered.
But be careful: “The interest rate will stabilize between 1.5 and 2.5 percent”, Brundia objects. Or to put it another way: The negative or low-interest stage, where the Saron mortgage costs 0.5 percent and the 10-year fixed-rate mortgage is less than 1 percent, probably won’t come back anytime soon.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
