Almost no difference in terms of duration: interest rates on fixed-rate mortgages are falling rapidly in Switzerland

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Market participants rub their eyes. Yields on Swiss federal bonds are at their lowest level since August 2022. After reaching a yearly high on Feb. 28, yields have fallen by more than half, from 1.50 percent to 0.71 percent.

Likewise, Swiss banks’ swap rates, which form the basis of refinancing for fixed-rate mortgages, have also fallen. Five-year fixed-rate mortgages cost more than 2.30 percent three months ago. The current window price on Mortgage.ch is currently 1.78 percent. The fixed-rate mortgage premium is typically between 0.50 and 0.70 percent compared to the swap rate. The chart below shows the change in swap rates in the last three months:

Background of the development: Inflation data announced in the USA and Europe since October have led to significant decreases in government bond yields around the world. But at the same time, on both sides of the Atlantic, the rhetoric of “high for a long time” interest rates threatens the economic situation.

As Banque Heritage investment director Jean-Christophe Rochat explained to Cash.ch, recession fears are growing, especially in Europe. “We do not expect the upward trend to continue as inflation now appears to be under control. “Central banks appear to have peaked interest rates and what the market needs to price in next is the first rate cuts.” Rochat added that swap rates should fall further in the coming months, driven by macro data and the central bank’s announcements regarding significant interest rate cuts.

Will the decline in yields stop soon?

As the decline has been evident recently, lower interest rates on fixed-rate mortgages are unlikely to be a surefire success as speculation grows about possible faster rate cuts by central banks. Migros Bank economist Santosh Brivio expects short-term 3-month swap interest rates to move in a narrow side channel around current quotes. The 10-year swap is expected to be around 1.60 percent. The reason for this “boring” forecast, according to Brivio, is that there are currently no fundamental factors that could cause a clear and sustained rise or fall.

The interest rate curve for swap rates is currently fairly flat, and the difference between 2- and 10-year fixed-rate mortgages is small. Likewise, swap rates may differ from bank to bank. Looking at the exchange rates currently available on Cash.ch, these are currently the most attractive at Zürcher Kantonalbank.

St. Thomas Stucki, chief economist at Cantonalbank Wales, is also not optimistic that interest rates will fall rapidly. While interest rates have fallen in the USA, swap interest rates have also fallen significantly in Switzerland. These therefore reflect the market expectation that the SNB will start reducing the interest rate in several steps towards 1 percent next summer.

Stucki counters this by saying that the inflation rate next year will remain stubbornly in the upper range of the Swiss National Bank’s (SNB) target range of 0 to 2 percent. The economy will weaken but will not fall into recession. “Expectations of a rapid rate cut by the SNB are therefore exaggerated.”

Stucki added that swap interest rates will therefore correct some of the decline and rise again in the next few months, but will not reach the 2 percent level again.

Will you continue to trust Saron or choose the safe option of a fixed rate mortgage?

In this environment, fixed-rate housing loans that are about to expire can be renewed as fixed-rate housing loans. Interest rates for 2 to 7 years are attractive as they are currently below 2 percent. This is still one percent higher than in the zero-interest rate phase, when fixed-rate mortgages were available at rates below one percent. However, market observers do not expect a return to this ultra-low level reported here by “cash.ch”.

The extent to which it would be beneficial to continue to rely entirely on the Saron mortgage depends on the risk tolerance of the mortgage borrower. If central banks cut interest rates quickly and sharply next year due to a possible recession, the Saron mortgage will represent the most attractive option, as “cash.ch” points out here.

50 percent fixed rate mortgage financing is definitely recommended for anyone who wants to sleep peacefully for the next few years. Because one thing is certain about financial markets: things often turn out differently than you think. And after the completely surprising, sharp drop in fixed-rate mortgage interest rates over the last three months, this could mean that things are changing again and interest rates may rise again.

Source :Blick