A rapid recovery in the last few months: Former mortgage darling Saron is no longer attractive

class = “sc-cffd1e67-0 fmXrkB”>

The decline in fixed-rate mortgage rates began quickly and without notice at the beginning of the fourth quarter of 2023: over a two-month period, 10-year fixed-rate mortgage rates halved and hit bottom in the first weeks of December. Since then, rates have increased slightly again, by 0.08 to 0.02 percentage points, over all periods between two and ten years. In a monthly comparison, the current level is still well below rates at the end of November, as the chart below shows:

The sideways movement in fixed-rate mortgages follows consolidation in ten-year federal bond yields. Since November 7, these rates have literally fallen from 1.16 percent to 0.56 percent in mid-December before experiencing a slight upward price correction towards the end of the year, as is the case with fixed-rate mortgages. Yields currently stand at 0.64 percent. As a reminder: Yields on two- to ten-year Swiss bonds form the basis for fixed-rate mortgages plus Swiss franc-denominated swap rates, from which the bank profit margin is calculated.

Flat distribution of fixed rate mortgages

A look at ten-year fixed-rate mortgage window prices on Hypotheke.ch shows that the best offer on a monthly basis is currently 1.67 percent, compared to 1.78 percent at the end of November. The distribution is fairly flat: Five- and six-year fixed-rate mortgages are offered at 1.63 percent. The top rate for a two-year fixed-rate mortgage is 1.68 percent; This results in a maximum spread of 0.05 percentage points across all maturities. Current levels indicate attractive offers from banks and other providers such as pension funds or insurance companies.

This is in stark contrast to October 2022, when the residential property interest rate index on Hypotheke.ch peaked at 2.91 percent. On Wednesday, the index fell to 1.98 percent, its third decline. The index shows the evolution of mortgage interest rates for long-term owner-occupied homes in Switzerland. A large number of data points are included in the calculation of the index each year. All common mortgage models are considered.

Significant increase in interest costs of Saron mortgage

While property owners once again benefited from more attractive interest rates on fixed-rate mortgages, owners of Saron-financed apartments and single-family homes have had to make do with refinancing costs that have increased significantly since October. There’s also a small, standard market surcharge of 0.53 percent, while the cheapest variable mortgage currently costs 2.28 percent. The Saron mortgage consists of the Saron lock interest rate of 1.75 percent and the bank’s minimum surcharge of 0.53 percent.

In October 2023, fixed-rate mortgage loan interest rates fell below Saron rates for the first time in a long time. Later, this gap widened further. The interest rate difference between the most attractive fixed-rate mortgage and the cheapest Saron rate is currently 0.60 percentage points in favor of the fixed-rate mortgage.

The next monetary policy meeting at the Swiss National Bank (SNB) is not scheduled until March 21, 2024. The Swiss base interest rate (or Saron) will therefore remain at the current level for the next three months and is therefore significantly higher than the interest rates offered on fixed-rate mortgages. It is also unclear whether the SNB will reduce interest rates at its March meeting. Economists and strategists surveyed by Bloomberg expect the SNB to make its first interest rate cut in the autumn of 2024 and Saron to remain unchanged until then.

Lower volatility and higher elasticity of bond returns

One of the reasons for setting lower rates for fixed-rate mortgages is the high level of confidence in the stability of the Swiss capital market for fixed-rate investments. The determined Swiss monetary authorities have been contributing to this by responding to the sharp rise in inflation since the summer of 2022 with significant interest rate increases without hesitation. The SNB also strengthened the franc through foreign exchange sales in an attempt to slow imported inflation.

On the other hand, inflation rose much faster in the USA and the Eurozone. As inflationary pressure eased in the USA, the American Central Bank unexpectedly signaled at the end of November that three significant interest rate cuts would occur towards the end of 2024. The European Central Bank (ECB) emphasized that significant interest rate cuts will only be considered after March 2024.

However, the market is currently suggesting that both the Fed and the ECB could cut key interest rates by up to 150 basis points by the end of March 2024. In contrast, the Swiss National Bank management is keeping a low profile as usual and has not announced a possible cut date in key interest rates.

Source :Blick