The timing is ideal: Here’s why it’s worth switching to a fixed-rate mortgage now

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In a monthly comparison, swap rates and therefore interest rates on fixed-rate mortgages remained at a low level. The drop in values ​​in the short range is notable because thanks to this “minor” change, for the first time in Switzerland, a short-term fixed-rate mortgage is cheaper than a variable-rate Saron mortgage. A similar interest rate situation existed in the late 1980s; But fixed-rate mortgages didn’t exist at the time.

The greater appeal of short-term fixed-rate mortgages stems from the yield curve in the six- to twelve-month range and the two-year money market interest rate. The six-month interest rate for mid-July 2024 is 1.63 percent and the twelve-month interest rate is 1.44 percent. This is lower than the current Saron base interest rate of 1.75 percent.

This means market participants are likely pricing in a 0.25 percent rate cut by the Swiss National Bank (SNB) in December, from 1.75 percentage points to 1.50 percentage points. Using two-year money market rates as a guide, a second rate cut is expected within two years, a 25 basis point increase to 1.25 percentage points.

Assuming that the SNB keeps the Saron at 1.75 percent until December, as expected in the market, and then reduces it to 1.50 percent and to 1.25 percent in the summer of 2025, the two-year average interest rate on the Saron is 1.50 percent. It will be slightly above . percentage. This interest rate compares with the swap rate of 1.06 percent for a two-year fixed-rate mortgage, according to the table below with data from Zürcher Kantonalbank. A two- or three-year fixed-rate mortgage has an interest rate advantage of more than 0.40 percent over a Sarong mortgage.

Homeowners benefit from this twice: First, there are significantly lower refinancing costs for the next two years. Second, mortgage holders can switch back to a Saron mortgage within two years as long as it offers better terms than a fixed-rate mortgage at that time.

not worth the wait

However, the time window for a change may be relatively short. St. First of all, lower rates for shorter maturities of two to four years are only justified if the SNB reduces its key interest rate quickly and sharply, Thomas Stucki, investment manager of Wales Kantonalbank (SGKB), told Cash.ch. He says it could happen. . If the SNB waits longer, swap rates and therefore fixed-rate mortgage prices will rise again, even though they are no longer likely to reach the current base interest rate of 1.75 per cent.

If swap rates increase accordingly, the interest rate advantage of the short-term fixed-rate mortgage over the Saron mortgage will decrease again or sooner or later disappear completely again.

This is due, among other things, to the still relatively high Swiss inflation rate. Stucki explained that the risk of inflation rising again to two percent in Switzerland remains relatively high, and that domestic inflation in particular is likely to remain in the two percent range for a longer period.

Therefore, the SNB could easily wait until next year to lower the interest rate and only lower it in 2025. In this scenario, the Saron mortgage will remain an expensive refinancing option for homeowners over the next twelve months.

Will the Central Bank give up sooner?

Rate cut speculation has run rampant in European money markets after French central bank governor Francois Villeroy de Galhau recently confirmed the European Central Bank’s (ECB) intention to start cutting interest rates faster than expected this year. Accordingly, the euro came under pressure to regain value against the franc. A rising franc would put further pressure on the local export industry and possibly contribute to a further economic slowdown in Switzerland.

Stucki also notes that only further appreciation of the franc could trigger an early rate cut by the SNB. In this case, Saron mortgages will become cheaper again and more attractive compared to fixed-rate mortgages – but only if swap rates do not fall at the same time.

As a reminder: Swap rates form the price basis for granting fixed-rate mortgages. Bank margin calculated separately for each customer is also added to the swap rate. Together, this results in a fixed interest rate mortgage.

Source :Blick