What do falling interest rates mean for Swiss property owners?

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Despite the surprising increase in the inflation rate in February, the end of the interest rate cycle in Switzerland is possible gradually. The market is already pricing in that the Swiss National Bank SNB will again significantly lower key interest rates over the next two years. The 1-year Swiss government bond yields 1.6%, 2-year 0.42% and 10-year 1.01%. The Swiss yield curve has “inverted” further in the financial market turmoil of the past few days.

“An inverted interest rate curve is a problem, especially for banks, because sooner or later the interest costs on the passive side of the balance sheet will be higher than the interest income on the active side of the balance sheet,” said Daniel, Bantleon chief economist. Hartmann told cash.ch. If banks try to keep deposit rates low to offset the decline in interest margins, they run the risk of withdrawing deposits from customers.

Capital flight puts pressure on CS

US banks, currently in trouble, had to contend with this capital flight. However, Credit Suisse is also under great pressure in this regard.

Therefore, central banks should be more cautious in their interest rate policies than in the past. If they continued to raise interest rates, they would reinforce the yield curve inversion. “The SNB’s interest rate policy is also likely to be affected, at least by problems at Credit Suisse,” Hartmann says. Bantleon chief economist forecasts a 25 basis point increase instead of 50 basis points at the upcoming meeting. The downward pressure on government bond yields should accordingly continue.

Inverted yield curve for Swiss mortgages

These market expectations, which have changed significantly in recent weeks, have also been reflected in housing loan interest rates. The yield curve is inverting with more and more mortgage providers. This is currently the case at Bank BSU, Bank Thalwil, Generali Versicherung, Glarner Kantonalbank, Hypoclick, Pensionskasse Stadt Winterthur and Swiss Life. As the chart below shows, the overall mortgage yield curve has flattened substantially since mid-2022.

When asked by Cash.ch, Florian Schubiger of Hypotheke.ch says, “It always takes some time for changes in federal bonds to affect mortgage interest rates.” Especially banks that use account balances to refinance mortgage loans are still waiting. According to Schubiger, only if the interest rate on the accounts increases, they will also fit well with short-term mortgage interest rates.

The fact that early providers have now reversed mortgage interest rates has tangible implications for planning real estate finances: “If you wanted to commit and reassure yourself long-term, you had to pay more up until now. You pay more for flexibility now and the hope of lower interest rates in the future,” says Schubiger.

Anyone who buys a short-term mortgage assumes interest rates will go down. On the other hand, those who think interest rates will stay the same will likely cost less with a five-year mortgage. This exceptional situation will likely become more apparent in the next one to two months, as the inverse interest rate structure will likely become more robust for mortgages. “Even when interest rates rose slightly, it was better to use Saron as the premium for long-terms is often very high. You pay less for longer terms now. And anyone who buys a Saron mortgage has to assume that interest rates will go down,” Schubiger sums up the development.

Downside pressure on yields and government bonds

However, the current financial market shock isn’t just responsible for the downward pressure on government bond yields: “We also assume that the economic situation will cloud noticeably this year. Hartmann says that a recession in Switzerland cannot be ignored. The pressure for the SNB to cut its prime rate is lower than it is abroad due to the lower base rate level – Hartmann expects a peak of between 1.25 and 1.5 percent. However, if Switzerland also falls into a recession, it is likely to moderately lower the basic interest rate by the end of 2023.

Hartmann predicts yields on 10-year Swiss federal bonds will be at least 50 basis points lower — about 0.5 percent — by the end of the year. In short, for Swiss property owners this means that fixed rate mortgages with a ten-year term can be purchased for significantly cheaper in just a few months. Therefore, reliance on short terms now in the face of falling interest rates may ultimately work as a temporary step in the long run.

“I still believe that fixed rate mortgages will develop horizontally and slightly upwards until the end of the year. The benchmark for a 10-year flat rate mortgage today is around 2.2 percent. Oxifina’s mortgage specialist and managing director Giampiero Brundia tells cash.ch that the interest rate should be between 2.2 and 2.4 percent at the end of the year. But Brundia also sees a viable alternative in the Saron money market mortgage, which is currently available at 1.50 percent.

Even if the SNB raises rates by as much as 0.5 percent next week, the Saron rate will still stay below a flat rate mortgage rate.

A 10-year flat rate mortgage still remains interesting

It is a situation where there are still large differences between offers on the market. “Besides the loan application, a 15-year flat-rate mortgage was offered 2.2 percent by one lender and 3 percent by another lender on Monday,” Brundia said. An interest rate difference of 0.8 percent a year is insane. That’s why you should always get different offers.

According to Schubiger, inflation continues to dominate interest rate developments. “If you assume that central banks will control inflation, then now you have to bet on short-term mortgages.” Especially in this scenario, interest rates need to come back quickly.

However, if you are unsure and do not have the appropriate risk capacity and willingness to take risks, it is better to choose a 10-year flat rate mortgage. This can now be settled relatively cheaply – 2.14 percent interest with the highest grade. If you are currently relying on a Saron mortgage and inflation remains high, you are taking a corresponding risk.

Source :Blick