Scognamiglio, real estate expert on mortgages: “If you have enough money, you can stay in Saron and speculate on interest rate cuts from the SNB.”

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Cash.ch: Rising mortgage interest rates worry many homeowners. Right?
Donato Scognamiglio: Anyone who finances with Saron immediately thinks about the further development of interest rates. On the other hand, fixed-rate mortgage borrowers wonder if they will have to refinance at a higher rate when the loan matures. These are homeowners’ concerns.

Have we reached peak interest rates, or are financing costs continuing to rise?
A horizontal movement is expected in the market and interest rates should have reached their peak thanks to the falling inflation trend. This means there is nothing to worry about. In my opinion, this attitude is not a good idea at all and there is a completely different reason for this: We need to take precautions. The question home and property owners need to ask themselves is whether they can pay 5 percent interest or whether it is possible to pay 6 percent interest on their mortgage.

A 5 to 6 percent mortgage is likely to create major problems for the majority of property owners.
The 1990s showed that even in Switzerland mortgage rates could rise to 8 percent. This means: If you have enough money, you can stay in Saron. However, if you do not want to speculate on future interest rate developments, it is advisable to take out a fixed-rate mortgage. This means it runs the risk of paying too much if key interest rates in Swiss francs fall again. But the homeowner is protected and the mortgage won’t be too expensive. In this regard: No to worry, yes to precaution.

Saron and mortgage interest rates have come close to each other. Will it stay like this for the next few months?
The market expects the convergence to continue over the next one to two years. However, in the medium term, we will return to the normal term structure in interest rates; That is, long-term interest rates will fall less sharply than short-term interest rates and the so-called reverse interest rate structure will disappear. In particular, we expect short swap rates to be around 1.30 percent in a year, and long swap rates to be around 1.6 or 1.7 percent. There is also the bank’s margin. However, in principle, it can be assumed that interest rates will normalize after the sharp increase in the last 17 months.

Geopolitically, things may develop differently and interest rates may continue to rise…
It is clear that interest rates will fall only if there are no wars that raise oil prices. Inflation is strongly influenced not only by core inflation but also by energy prices. If inflation rises again, Swiss National Bank (SNB) President Thomas Jordan will likely turn the interest rate screw again. Everyone is happy when they don’t have a lot of debt. After all, there is risk not only in interest rates but also in real estate prices.

If interest rates continue to rise, will home prices fall?
This situation becomes unpleasant for homeowners when the bank finds out that the mortgage holder cannot pay the interest, has to inject additional money due to depreciation or, in the worst case, has to sell the house because there is no longer enough money. Equality. This is the horror scenario that will land owners in trouble. Then prices in the market really start to fall. But I do not expect such a scenario, the market is quite strong due to high demand.

What advice would you give to homeowners who purchased a home in the last decade and have relatively large mortgage debt?
The important thing is to continuously increase the equity base and reduce the mortgage burden from an 80 percent burden to 65 percent within 15 years after the purchase of the house. This ensures that price correction in real estate can be mitigated without the need for immediate greater equity. For me, reducing the debt ratio is vital, especially in uncertain times, because the biggest risk for homeowners is and remains a lack of equity. Another problem with fire sales is that the sales price comes under pressure. This could lead to an even greater loss. It’s really important to avoid a situation where the homeowner has his back against the wall.

Is Saron recommended in the current environment?
Anyone with sufficient savings capital in the form of bank deposits or savings deposits can consciously stay in Saron and speculate on interest rate cuts by the SNB in ​​the next two years. But if there is a tense situation at work or you are not entirely sure of your future prospects, I think you should take out a fixed mortgage.

The higher the burden, the sooner one should get a fixed-rate mortgage.
Yes, as long as there is no more security. The higher the load, the greater the risk of the invested equity. That’s why banks don’t go beyond 80 percent financing because that would be even riskier. The deeper the financing, the more immune the owner is to interest rate and price fluctuations in the real estate market.

Is the need to invest in energy efficient renovations likely to cause headaches for some property owners in the near future?
This is actually where this comes into play. Depending on where you live, there are cantonal regulations stating that within a certain period of time the oil heating must be replaced by a heat pump or the roof and façade must be renewed in terms of energy technology. This costs money due to the requirements involved.

The “net zero” climate target forces homeowners to comply. What does this mean for property prices?
It makes the real estate asset class less attractive in the short term. It’s like having to pay additional fees for stocks. We see that especially in large projects, craftsmen do not have the capacity, meaning energy-saving renovations cannot be carried out in the required time. This leads to properties being sold at a discount on renovation costs.

Who pays for this?
First the owner must receive the money, but then the new tenant or new owner of the detached house or apartment pays the money. It will just be expensive. This is problematic as many people in Switzerland want affordable and cheap housing. The majority of the market does not demand luxury properties. Things are likely to be particularly difficult for low-income families. These are difficulties.

Is this why property prices continue to rise?
This primarily leads to increased costs. On the one hand, you need a well-equipped renovation fund, on the other hand, you need to think carefully about which houses and apartments you want to live in. The question is whether I really want to move into a 30-year-old apartment that will need to be completely renovated in the next few years and then I’ll be paying double the rent. Older people in particular would do well to upgrade to something new if they can afford it, to avoid this replacement cycle.

Donato Scognamiglio is Chairman and former CEO and partner of the Real Estate Information and Education Center (IAZI) in Zurich.

Source :Blick