Sarong and fixed-rate mortgages falling?: Developments that Swiss property owners should expect

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The Swiss National Bank (SNB) refrained from increasing the interest rate further at its meeting on September 22. To the surprise of many, Switzerland left its benchmark interest rate at 1.75 percent. As a result, not only has the Saron, which is vital for money market mortgages, changed, but the mortgage interest rate index, which is dominated by fixed-rate mortgages, has been on a downward trend ever since.

This shows once again that Switzerland is not an island when it comes to interest rates. “Although SNB boss Jordan has publicly warned against further interest rate hikes, this does not appear to have had much impact on market participants. “They expect interest rates to fall in the medium term, which will then be reflected in the extremely flat mortgage interest rate curve,” says Florian Schubiger of Kredite.ch, when asked by Cash.ch.

Hypotheke.ch index fell again to the August 2022 level with a value of 2.19 percent. Annual interest costs fell by 64 basis points, or 5,120 francs, compared with a peak of 2.83 percent in October last year.

An important reason for this development is that the interest rate increase process in Switzerland is slowly approaching its end. The market is currently pricing in the fact that the Swiss National Bank (SNB) will significantly cut interest rates again within two years. The yield of the 1-year Swiss federal bond was 1.690 percent, the 2-year yield was 1.283 percent, and the 10-year yield was 0.927 percent.

“In addition, swap rates, which form the basis for mortgage interest rates, have fallen more sharply than in Switzerland,” says Claudio Saputelli, head of real estate at UBS Global Wealth Management’s investment centre, regarding falling mortgage interest rates.

The refinancing rate on which a fixed-rate mortgage is based is called a swap. The swap rate consists of the yields on federal bonds of the same maturity and the risk premium in the swap market. The mortgage borrower’s interest rate is determined by the swap rate and the financial institution’s margin.

A dazzling world

The yield curve has therefore “inverted” and this also has a direct impact on the mortgage market. “What a complicated world. Mortgage expert and Oxifina managing director Giampiero Brundia tells Cash.ch that a 7-year fixed-rate mortgage currently costs 1.75 percent, while a Saron mortgage costs 2.10 percent.

If the SNB pursues a restrictive monetary policy by increasing the key interest rate or leaving it high even though the market expects lower interest rates, short-term mortgages remain “expensive”. Long-term mortgages become cheaper and fall below the interest threshold in the short term.

Current “window prices” for five-year Swiss mortgages on comparison platforms start at 1.81 percent; The cheapest offer for mortgages longer than ten years is 1.94 percent. Other interest rates may also be negotiated depending on income, amount of equity, or property type.

However, interest costs can be significantly higher for mortgage borrowers who do not have great credit. Here Cash.ch explains how to optimize interest costs when negotiating a mortgage.

* Best terms only, general information – actual interest rate may be higher due to various factors.
** Best conditions, reference values, for a new mortgage of 800,000 francs with a property value of 1 million francs in the canton of Zurich.

The lowest margin for the Saron mortgage on comparison platforms is 0.47 percentage points. The lowest interest cost is 2.17 per cent, with the Saron interest rate of 1.70 per cent based directly on the SNB’s base interest rate.

That’s even higher than the best deal on a 10-year fixed-rate mortgage. Anyone taking out a Saron mortgage should expect significant interest rate cuts to make it worthwhile.

Has the peak interest rates been reached or is it interest rate cut enthusiasm?

“Fixed-rate mortgage interest rates will settle at the ‘new’ lower level with fluctuations of plus/minus 0.25 percent. Brundia predicts Saron mortgages will remain “expensive” for months. The Swiss National Bank will not cut the interest rate so quickly because its key interest rate of 1.75 percent is close to the 2 percent target rate for inflation and interest rates. These target values ​​have priority for the SNB.

Brundia is not alone in this stance: “There is actually something to suggest that interest rates will be slightly lower than they are now in the medium term. “But I think the enthusiasm about rate cuts is a little too much right now,” Schubiger says. One can well imagine that the trend towards even lower interest rates will end relatively quickly. In addition, there is an upward potential due to the good economy and the effect of the inflation problem, but this is completely overlooked in the whole discussion.

UBS’s Saputelli takes the opposite view: “We assume that interest rates have peaked. “We expect two interest rate cuts next year: September and December.” Therefore, mortgage interest rates are likely to continue to decline gradually; This is especially true for Saron.

In this scenario, the inverted mortgage interest rate curve is likely to disappear step by step. Accordingly, Saputelli recommends not relying entirely on long-term fixed-rate mortgages at this time. “A mix of money market mortgages and short- and medium-term fixed-rate mortgages is likely to be more advantageous in the current environment.”

In the current market situation, Brundia recommends checking existing Saron mortgages and fixed-rate mortgages due soon and aligning the financing strategy with the current interest rate situation. “Short- and medium-term fixed-rate mortgages should be prioritized,” says Brundia.

Cheap security

“If you’re willing to take the risk and can afford it financially, you can get a Saron mortgage and bet that interest rates will drop significantly,” Schubiger says. However, the risks of this strategy should not be underestimated. Anyone who is looking for financial planning because it is important to their own personal financial budget, or who can no longer sleep peacefully when interest rates double, can now have a clear conscience for a mortgage of seven years or longer. This security is inexpensive due to its flat interest rate curve.

It’s important to know that not all lenders reduce mortgage interest rates by the same amount. Therefore, it is important to keep a close eye on interest rates and compare many providers against each other, especially in the current volatile environment.

This is the only way to make the most of falling interest rates. If a provider only adjusts interest rates weekly, it is worth waiting for the right moment given the current falling interest rates.

Here, Cash.ch lists the common mistakes Swiss property owners should avoid when making a mortgage.

Source :Blick