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Saron mortgage borrowers managed to pop the champagne corks in March. The Swiss National Bank (SNB) cut the interest rate by 0.25 percentage points to 1.50 percent, much earlier than expected; This means that the Saron mortgage loan became cheaper at the same rate overnight.
And things are likely to get better: St. Even more defensive economists, such as Thomas Stucki of Kantonalbank of Wales, who do not expect any rate cuts this year, now expect more rate cuts. “The SNB will have to cut rates further to avoid becoming unreliable after starting the rate-cutting cycle,” Stucki explains to Cash.ch.
Fixed-rate mortgages haven’t lost their appeal – on the contrary
This potential for further rate cuts is reflected in the market: the Swiss capital market is pricing in two more significant interest rate cuts of 0.25 percent each by the end of the year. The SNB has three options to evaluate the monetary policy situation at its meetings in mid-June, September and December. If this prediction comes true as the markets expect, the Saron interest rate will decrease from 1.50 percent to 1.00 percent throughout the year. In addition to the common interest margin of 0.60 to 1.00 percentage points, the Saron mortgage will be 1.60 to 2.00 percentage points from mid-September to mid-December.
However, it is too early to think that fixed-rate mortgages are unattractive. Following last week’s key interest rate cut, yields and swap rates on Swiss federal bonds have also fallen significantly. According to the chart below, the yield on ten-year Swiss bonds has fallen from 0.88 percent to 0.60 percent since the beginning of March, while swap rates have also fallen between 0.10 percent and 0.17 percent.
Swap rates are now back to end-2023 levels and the increase to the end of February has been corrected. In the short term, there was a serious decline; meaning the cost of two- to five-year fixed-rate mortgages was significantly lower than at the beginning of the year. Longer maturities are trading more or less unchanged.
The yield curve thus corrected the inversion; that is, short-term interest rates are higher than long-term interest rates. A look at the comparison portal Kredite.ch confirms this flattening. The window price for a two-year mortgage is 1.63 percent, and for a ten-year mortgage it is 1.68 percent.
This means short-term fixed-rate mortgages have nothing to hide compared to Sarong mortgages. With the price drop, two- to three-year fixed-rate mortgages come to around 1.70 to 1.90 percent – many of the banks’ offers are above the showcase prices on Kredite.ch. This compares with a Saron mortgage currently at 2.10 to 2.50 per cent – the equivalent of a 1.50 per cent Saron plus the bank’s interest margin of 0.60 to 1.00 per cent.
The conclusion is clear: key interest rates must continue to fall for Saron mortgages to close the interest rate gap compared to short-term fixed-rate mortgages. This is also because the SNB’s significant interest rate cuts have only had a small impact on long-term interest rates. These have already been priced by the capital market.
A mix of mortgages and fixed-rate mortgages is the best option
If the Sarong falls to 1.00 percent, current refinancing costs for two- to three-year fixed-rate mortgages would be only 0.10 percent more expensive. In numbers, this additional fee leads to a higher interest cost of 500 francs on a mortgage of half a million francs. As a reminder: Over the past decade, the Saron mortgage was the significantly cheaper refinancing option, especially during the zero interest era.
However, this small margin in favor of Saron will only come into play if local monetary authorities reduce the key interest rate to 1.00 percent. If the base interest rate falls to 1.25 percent, the cost of a two-year Saron mortgage is higher than the cost of a two-year fixed-rate mortgage.
So a mix of fixed-rate mortgages and Saron financing still looks like a good choice. The advantage of a fixed-rate mortgage is that maximum fixed costs are fixed in advance. Even though interest rates are currently falling, they remain a fundamental building block in financing your own home.
Saron would have to sink further
To truly differentiate Saron mortgages from fixed-rate mortgages, either Saron will need to fall towards or below 1.00 percent, or long-term rates on fixed-rate mortgages will need to rise again.
It is important to note that although the Central Bank still has the opportunity to reduce interest rates, it is important to follow inflation. The SNB’s inflation forecast is the same as February, 1.2 percent. This means that short interest rates are positive in real terms (the base interest rate minus inflation) plus 0.30 percent. If inflation remains at 1.2 percent over the next 18 months, as predicted by the SNB, and the interest rate falls to 1.00 percent, real interest rates will still be negative at 0.20 percent. Key interest rates are likely to fall below 1.00 percent only if there is a global recession with a deflationary trend.
Second, there are risks at the long end of the yield curve. Real interest rates here (the yield on 10-year federal bonds minus inflation) are currently in negative territory at 0.60 percent. During the zero-interest period from 2015 to 2021, average inflation was 0.10 percent and the yield on federal bonds was minus 0.24 percent. As a result, the real interest rate became 0.34 percent. In this regard, the possibility of a counter movement here so that the real interest rate difference becomes less negative cannot be ignored. This may cause interest rates on fixed-rate mortgages to increase.
Everyone in Saron, who is still 100 percent financed, is speculating that the Central Bank will cut further interest rates. A short-term fixed-rate mortgage is only marginally more expensive, with an “expected” base interest rate of 1.00 percent. Anyone who would rather have the sparrow on the roof than the dove on the roof would be advised to take out a fixed-rate mortgage or fixed part financing in addition to the Saron mortgage.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
