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According to Vice President Martin Schlegel (47), the Swiss National Bank (SNB) cannot ignore further rate hikes to rein in expanding inflation, Bloomberg news agency reported. Inflation in Switzerland is low by global comparison at 2.9 percent. Still “too high”, according to Schlegel.
These remarks by the Central Bank Deputy Governor at an event in Winterthur ZH on Wednesday are another indication that the SNB is heading for further tightening in its June rate decision. Rate increases in Switzerland lag behind rates in the US and eurozone – monetary policy meetings at the SNB are held quarterly only.
Because supply is so limited, the residential real estate market has weathered the rise in interest rates in Switzerland better than elsewhere in Europe. Still, according to Schlegel, he is not immune to problems. Prices have risen more than fundamental data justify, and there is potential for correction in Switzerland as well. Both the mortgage and the domestic market are vulnerable.
Saron mortgage over 2.5 percent
A summer rate hike will have special consequences for Swiss property owners who rely on Saron mortgages. Because the Saron interest rate is directly based on the SNB’s prime rate. The total cost of interest for mortgage borrowers consists of the provider’s interest and margin.
The SNB interest rate is currently 1.5 percent, while the Saron rate is fixed at 1.4 percent. The difference remains questionable as the mechanism behind it is so complex. Simply put, Saron is based on real transactions, where demand and supply determine price. Currently, Saron is hovering below the target value as there is a tendency to excess liquidity in the market. However, the SNB ensures that this deviation is kept to a minimum.
For Saron mortgage holders, who currently have to bear the interest cost of at least 1.84 percent—a margin of at least 0.44%—how much the SNB will raise the prime rate is crucial. In its latest report on mortgage rates, Credit Suisse estimates that core interest rates will increase by 50 and 25 basis points in June and September, respectively.
In this scenario, a Saron mortgage will likely be available at 2.59 percent in September, which will be more expensive than some fixed-rate mortgages as of today. Five-year fixed-rate mortgages start at 2.38 percent on comparison platform hypotheke.ch, and the cheapest home loan offer in over ten years is 2.44%. Other interest rates can be negotiated depending on income, amount of equity and type of property. However, interest costs can also be significantly higher for mortgage borrowers who do not have the highest credit ratings.
“Fixed mortgage interest rates are unlikely to rise above last fall’s levels, as we expect a gradual decline in inflation over the coming quarters,” the Credit Suisse report said. However, from levels that are now significantly lower, interest rates could again move upwards by 25 to 55 basis points.
Saron remains the cheapest financing alternative
Economists at Raiffeisen Economic Research are more optimistic and only expect the SNB to raise interest rates to 1.75 percent again in June. According to his estimations, the summit should have already been reached. “In the 12-month horizon, we also see the key interest rate as 1.75 percent. The terms of Saronic mortgages will evolve accordingly, they are practically based on a 1:1 base interest rate, »add experts to cash.ch.
For Raiffeisen Economic Research, individual risk appetite and risk capacity are decisive when choosing a mortgage. “However, according to our estimates, Saron remains a cheaper alternative to financing. “Money market mortgages are often significantly cheaper than fixed-rate mortgages, especially in the long-term perspective,” economists say. However, if the measures taken so far don’t work, the risk remains great that central banks will have to raise interest rates further to combat persistent inflation. Mortgage borrowers who now take money market mortgages should be aware of this risk.
“Central banks don’t want to raise interest rates for fun, they want to fight inflation,” said Adrian Wenger, mortgage specialist at VZ Vermögenszentrum, when asked by cash.ch. Switching from Saron to a flat rate mortgage is now a bad decision. Only someone who thinks interest rates will rise quickly does that. “You can see from the flat interest rate curve that this is not the case,” Wenger adds.
According to Wenger, anyone who trusts Saron, which is cheaper than fixed-rate mortgages over the long term, should understand the model—interest rates can change quickly. Ideally, Saron mortgage holders would expect 2 to 3 percent: In years with low interest rates, large provisions could be made or the mortgage repaid. “But those who consume savings – many young people who have no experience with high interest rates – will of course be tight for them,” the mortgage expert says.
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.
