Saron and flat rate mortgages: property owners “on hold”

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The downward trend in inflation raises hopes among Swiss property owners that interest rates will come down soon: US consumer prices rose just 3.0 percent in June from the same month last year. This is the smallest increase since March 2021. And Switzerland is also falling, as the June data show. Pressure on the Swiss National Bank (SNB) to raise interest rates again in September is easing. Raiffeisen Investment Manager Matthias Geissbühler told cash.ch at the beginning of July that there were no further rate hikes.

It was only in mid-June that the SNB increased the underlying interest rate by another 25 basis points to 1.75 percent, directly affecting the interest costs of money market mortgages. The interest rate on money market mortgages is based on Saron (short for Swiss Average Rate per Night). This is a Swiss reference rate that closely aligns with the official prime rate of the SNB. A year ago Saron was -0.2 percent. It is currently at 1.7 percent and shows the impact of four interest rate hikes in the same period.

By contrast, the mortgage interest rate index, dominated by fixed-market mortgages, has been trending down slightly since the October high and is now at 2.54 percent.

Is there already a trend towards fixed rate mortgages?

Fixed-rate mortgages are already being increasingly rebought, although many believe the SNB’s key interest rates will fall again in the coming years, and Saron mortgages are likely to be cheaper as a result. At least that’s what Florian Schubiger from Hypotheke.ch observed. A year ago, almost 50 percent of real estate buyers had chosen the key interest rate-based Saron money market mortgage, but that rate dropped to 37 percent in July.

“The striking thing is that Saron’s lower rate is largely due to the higher 10-year fixed-rate mortgage rate,” Schubiger says when asked by Cash.ch. At Hypotheke.ch, 27 percent would currently buy a ten-year fixed-rate mortgage, compared to 15 percent a year ago. The need for security and predictability has grown, albeit associated with higher costs for fixed rate mortgages backed by government bonds.

Oxifina Managing Director, Giampiero Brundia, is yet to see this improvement among his clients: “Only right now the inverted yield curve means that mortgage holders prefer longer terms (7 to 10 years) over shorter terms (3 to 5 years).” Most of their clients conclude on a Saron basis. This is with the intention of switching to a fixed rate mortgage when interest rates drop.

Swiss mortgages’ current “showcase prices” are an example of an inversion of the yield curve: Three-year fixed-rate mortgages start at 2.31 percent on comparison platform hypotheke.ch and are the cheapest offer for home loans. is 2.25 percent for five and ten years. Other interest rates can be negotiated depending on income, amount of equity or type of property. However, interest costs can also be significantly higher for mortgage borrowers who do not have the highest credit ratings.

Many mortgage borrowers have taken advantage of favorable mortgage terms in recent years. With both a Libor/Saron mortgage and a flat rate mortgage. The 2% interest rate hike over the past 2 years has clearly increased real estate costs for mortgage borrowers with maturing Libor/Saron or fixed rate mortgages. “To alleviate the overhead, some mortgage holders now take a Saron mortgage that costs 2.2 percent and not a long-term fixed-rate mortgage that costs over 2.5 percent,” explains Brundia.

Mortgage creditors on the alert

Brundia notes that a 0.5 percent interest rate adjustment leaves mortgage borrowers open to long-term fixed-rate mortgages. “Meanwhile, the same goes for interest rates, which skyrocketed for fear of hedging.” Brundia thinks this “hold on” is appropriate. There’s no point in “going crazy” with the slightest fixes.

Schubiger also points to this wait-and-see attitude: “In our conversations with customers, we often hear that they wait and switch to a longer model when interest rates drop.” Two years ago, many argued in favor of Saron mortgages because almost no one expected interest rates to rise, so they chose the cheapest model. The arguments for Saron today are different. Many believe that interest rates will fall in the next few years and therefore do not want to remain stable for long.

This reluctance to commit too soon discourages mortgage borrowers from taking a “high-priced” long-term fixed-rate mortgage. If interest rates fall, they cannot benefit from this development. For example, between 2000 and 2008, this happened to many when the cost of long-term mortgages was between 3.5 and 4.5 percent. Shortly after, interest rates fell sharply.

Saron and short-term fixed rate mortgages are advantageous

“I think it’s still possible to get a Saron mortgage as long as you have the financial leeway and can withstand rapidly rising interest rates,” Schubiger says. Customers seem to be looking at it in a similar way: Saron completion rate is still relatively high on both Hypotheke.ch and Oxifina. “This doesn’t surprise me because the yield curve is also inverted for certain mortgage providers,” Schubiger says.

While Schubiger considers it unlikely, Saron mortgages should be aware: Interest rates can go well above 4 percent. “Anyone who later gets into financial trouble or can no longer sleep peacefully should take a longer flat-rate mortgage, even in the current situation.”

Saronic mortgages and short-term fixed-rate mortgages currently have an advantage for Brundia due to falling mortgage interest rates in the current interest rate environment. That said, Oxifina continues to occasionally take longer-term fixed-rate mortgages and short-term fixed-rate mortgages — so-called bargains — whose interest rates are below the market bid for saron.

But to be honest, these bargains are ultimately out of reach for many property owners: Larger loan volumes (from CHF 5 million), well-located residential properties (multiple residences) and low loan-to-value ratios (up to 60 percent) is necessary.

Source :Blick