Tips from a financial expert: How to negotiate a mortgage at the bank?

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Cash.ch: What are the biggest mistakes potential homeowners make when it comes to mortgage loans?
Florian Schubiger: It is not a good idea to go to the bank without a strategy and preliminary explanation. You should first consider which risk is suitable for your personal situation. Second, many people do not realize that there is room for negotiation on interest rates. Banks’ offers are not sacred at all. Therefore, the biggest mistake is to take out a mortgage without speaking to the lender first. Third, to prepare for a good negotiation, you should have a market overview of what mortgage models make sense and what interest rates can be expected. The basis of the debate is the beginning and the end of everything.

It is probably difficult for many people to understand how much they can still gain from negotiation. How should you proceed?
This depends on the institute and your personal situation. Most opportunities exist where there is financial flexibility. Slightly better affordability or a lower loan-to-value ratio are often the strongest arguments for a better interest rate. Of course, exploring boundaries is not that easy. You can use mortgage platforms or general interest rate comparisons online to find out approximately how much you can get from your bank.

Are there differences in the type of negotiation depending on the size of the institution?
Traditionally, you can mostly negotiate with banks. In most cases, a discount of 0.2 to 0.3 percentage points is possible, especially if you have a good personal credit score. Larger discounts are more difficult to obtain because this usually needs to be approved by higher bank staff. However, this is also possible with mortgages that are attractive to the bank. There is generally less room for negotiation when it comes to pension funds and insurance companies.

Are banks at the top when it comes to interest rates?
I have never seen a bank that offered the best possible mortgage interest from the very beginning. You can also see this in the interest rates published online, which are never among the cheapest. They do not want to enter into negotiations with an initial interest rate that is too low, even when extending their mortgage. They usually give a discount knowing the margin is still good.

Banks often offer benefits…
I would take into account any benefits very carefully. But it often turns out that these advantages – for example, slightly lower depreciation – do not justify the higher interest rate. Many people forget what half a percent on a half million mortgage means. In ten years it will be 25,000 francs.

What about pension funds?
Pension funds have much less bargaining power. Many pension funds, investment trusts or insurance companies offer an interest rate that is fully fixed from the beginning.

Is this situation in banks a sign that the market is not actually doing well?
Most Swiss people do not compare this often and do not like to bargain. Therefore, the game for banks in Switzerland is easy. However, the situation is gradually changing due to greater transparency on the internet. Today customers have more options for comparison.

After all, your personal credit score is crucial to your negotiation scope. How do you improve this?
We know how each institution weights the criteria and evaluates it regularly. There are three main points that are very important: Loan to value ratio is the most important, followed by affordability and mortgage amount. If all three parameters are good, you have the highest rating. However, the criteria are not the same for every institution. Therefore, I recommend asking your bank advisor directly: What do I need to do to get a better interest rate?

To what extent do tax considerations also play a role here?
The link between mortgage amount and taxes is often overestimated. On the one hand, there is the imputed rental value, which is fixed regardless of the mortgage amount and must be taxed as income. On the other hand, mortgage interest rates are, for example, 2 percent. With a marginal tax rate of 25 percent, the after-tax mortgage cost is a quarter less, or 1.5 percent. This is because mortgage interest can be deducted from your income on your tax return. In this example, everyone who invests must earn at least a 1.5 percent after-tax return. Otherwise, the mortgage will cost more than you make on investments. The important thing in this, of course, is that you do not need funds tied to property in the long term and that investments are diversified in terms of risk.

How should you approach a mortgage at the end of your life?
Regarding age, it is very important that the mortgage is repaid only to the extent that sufficient liquidity will be available even in old age. It’s not so easy to get a new mortgage when you’re older. In practice, it happens that someone owns a valuable property without a mortgage, but has just enough money in his account to cover living expenses. A long-term financial plan is important to avoid negative financial surprises as you get older.

You can finance your home ownership with low interest rates for years. Despite currently falling interest rates, should this scenario be put aside?
Interest rates are currently falling again, and there are voices that expect interest rates to decrease further in all maturities in the medium term. Personally, I believe the days of 10-year fixed-rate mortgages at less than 1 percent are long gone. Many people ignore the fact that interest rates may rise again in the long run. In this regard, it mainly depends on the economy and inflation. These parameters actually point to a relaxation in interest rates. History has proven countless times how quickly this can change.

What are you currently observing on the demand side of the mortgage market?
Saron mortgage loans were the cheapest for a long time. Five-year and sometimes ten-year fixed-rate mortgages are now available on better terms. There has been a significant shift away from Saron mortgages towards five- or ten-year terms in recent months. This is understandable: anyone who trusts Saron needs to be confident that interest rates will fall significantly and sustainably.

The sarong is only for the brave…
You have to be aware that it could be three or four percent in just a few years. On the contrary, Saron mortgages are not fundamentally bad. They don’t fit every situation.

Tactically speaking, do short-term fixed-rate mortgages make more sense?
A three-year fixed-rate mortgage is currently significantly cheaper than a Saron mortgage. Whether it is currently fixed for three years or whether the Saron mortgage is better is up to speculation. Ultimately it’s more about your personal starting point. Risk capacity determines whether the Saron mortgage is an option.

Doesn’t this mean that the interest rate forecast is ignored?
In the second step, personal expectations regarding interest rates can be taken into account. But the point is that only those who are willing and able to take risks should get larger sums from the Saron mortgage. Anyone who places too much emphasis on personal interest rate expectations when deciding on a mortgage model should also be aware that this could backfire.

What kind of interest rate increase do you expect?
I don’t expect a big rise or fall in the next two years. Interest rate cuts on short-term interest rates appear realistic at the moment. However, this situation needs to change quickly if inflation returns.

However, it is also claimed that Saron is the best choice in the long term…
Of course, if you don’t change over a long period of time and always stay in Saron, you’ll always do better than getting a long-term fixed-rate mortgage. This is because the interest rate curve is generally steep; So you pay more for long terms than for short terms. But that doesn’t mean it’s always best to trust Saron. Depending on the initial situation, you can use phases of low interest rates to make a long-term commitment.

Should you really diversify your mortgage terms?
I’m not a fan of step mortgages because you become dependent on the lender. If the first, shorter tranche expires, you generally won’t be able to switch lenders and therefore lose most of your bargaining power. In my opinion, if you want to stumble you should probably combine Saron mortgages with fixed rate mortgages.

Home or rental with this starting point?
With rising interest rates, the financial advantage of home ownership is no longer clear and has even reversed. When it comes to interest rates, we are at the same point as in 2014. However, in the canton of Zurich, property prices increased by 50 percent, while wages increased by only 5 percent on average. Since rents are regulated, they can only be increased with a delay and usually only when the tenant changes. When real estate prices and interest rates increase, renting automatically becomes more interesting.

Who can still afford today’s high prices in the residential real estate market?
Individuals or married couples over the age of thirty can rarely finance homeownership on their own. Parents or other close people almost always offer support in the form of a gift or advance inheritance. Thirty years ago this was not the case. Calculating affordability is becoming challenging for many property buyers and therefore buyers are getting older.

Florian Schubiger is CEO and co-founder of Hypotheke.ch, a fully digital Swiss online mortgage platform. He is also a co-founder and today a member of the board of directors of VermögensPartner AG, which has been operating since 2007 and is an independent asset manager licensed by the Swiss Financial Market Supervisory Authority, FINMA. Florian Schubiger studied business administration at the Zurich University of Applied Sciences (ZHAW) and is currently a lecturer in the Master’s program in Financial Consulting.

Source :Blick