10y fixed vs libor


#1

When offering mortgages, all banks assume you want to have 10y fixed interest, why not going for libor or 2y istead? I feel like they are selling me an expensive insurance that I don’t really need… Any mustachian thought on this?


#2

Apart from the expected interest yield, banks see the following advantages:

  • With fixed mortgages, you get a prolongation offer some weeks before it’s due. That offer usually gets the bank better conditions.

  • Should anything happen in those 10 years (divorce, medical stuff) or should you sell the house and they don’t like the buyer or the buyer does not want this mortgage --》 you owe them money for early termination

  • No other bank will give a further mortgage on the house; the customer is locked in for 10y. Expect worse terms in such a case.

These are the terms of the “insurance”. As banks need to reserve more capital (as ordered by SNB), they are often also not competitive in their offers with regard to insurance firms or your Pensionskasse. The last ones (not all of them, you have to ask) entered this market in search for more dependable yield. (So it is not the same as Vorbezug.)


#3

I can tell you that in Poland for many years there only existed the LIBOR loan (actually the PLN equivalent, WIBOR). But you have the mandatory monthly repayments already planned for the next e.g. 30 years.

In Switzerland, if you fixed the rate in the last 30 years, it would have always been a bad decision, because the LIBOR was falling almost all the time.

How is it gonna be in the future? It’s kind of a gamble between you and the bank. As @cray said, with a LIBOR mortgage you’re more flexible. You can switch the bank if you find a better offer, and you can fix your mortgage at any time.

As an afterthought: currently the LIBOR is really low (negative) and it’s hard to imagine it would go even lower. However, it’s not hard to imagine it going up to it’s historical average of 5%. Well, the banks bet against it, by the fixed rates they offer, I guess they bet it’s not gonna go up. Just saying, if it suddenly spikes to 5%, you will be regretting that you didn’t fix it earlier :slight_smile: .


#4

Yields have to rise at some point, no? It’s just that the ECB is in a mess (shaky economic data, high national debts, Brexit) so that their rate raising is some time away. SNB depends on the ECB, would otherwise risk that the Frank appreciates.

Libor will remain cheaper until it isn’t. When rates start raising, the conditions of the 10y will price that in. VZ wants to have indicators that will tell you when to switch… I wouldn’t know about that.

Edit: did not see the afterthought when writing the above.


#5

The European governments are relying on low interest rates in order to pay debts. ECB is printing money and buying the bonds of Italy etc., raising their price and lowering their debt. If this stops, then Italy, Portugal and Greece may go bankrupt.


#6

Yes, I mentionned the high national debts. The US has been paying off its WWII debt this way (1945: 122%; 1980 33%; via inflation). This however does not exclude interest rate rises.

Or do you think monetary policy will give up this instrument? What shall they do when the economy cools in the next recession? Lower rates some more?

I think they will have to raise rates at some point in the mid-term future. This might also pop the asset price bubble, though.


#7

I didn’t do the actual math, but I would say the debt reduction was in half due to inflation and in half due to real GDP growth.

I have no idea what will happen, but if a government debt is 100% of its GDP and the cost of debt goes from 2% to 10%, they will struggle to cover this gap.


#8

I agree; however and interestingly this was roughly the situation of the U.S. 10y treasury yields after the war (and debt/gdp)


#9

That’s an interesting observation. I looked a bit more into this. In 1945, the nominal federal debt was $250 billion, in 1977 it was $750 billion (3x). The nominal GDP went from $226 to $2278 billion (10x). However, the Real GDP went from $2000 billion (2009 chained dollars) to $6000 billion (3x).

For many years, the debt didn’t grow even in nominal terms, and after 30 years, it had the same value in real terms. So I guess the recipe to reduce debt is to triple your GDP. Can EU triple its real GDP until 2050? :stuck_out_tongue:


#10

I enjoy our little discussion.

I would posit: A nation can increase its debt at the rate of inflation (interest included) and let the growing GDP solve the mess.

Hypothesis: As both the US and some EU member states have high national debts, there is a considerable motivation to produce inflation over the interest rates (net inflation). This on the other hand, would strengthen the Swiss Franc. I now understand better, why the IMF gave the recommendation to Switzerland to consider not to reduce the debt but to make debt. The SNB is in a really difficult situation. Keeping the exchange rate and raising interest rates seem like mutually exclusive goals for as long as one can see.

Following these thoughts, a libor mortgage could be a good bet. (Original poster, did you think we forgot you??! :grin: )The problem is, economic forecasting is usually as successful as throwing a coin. :upside_down_face:


#11

From the very beginning, I was set as having my mortgage as a mix of Libor and Fixed. Part for reduced cost, part for “safety”, obviously. I have 1/3 Libor and 2/3 Fixed 9y.

Not all bankers are out there to get you. My advisor at UBS actually said he, personally, would go for at least 50% Libor and well … I should have taken his advice.

I will probably convert to 100% LIBOR when my fixed mortgage expires. At the same time I’m paying my amortization and build a safety pocket to repay a part of my mortgage should the rates become very expensive. My long term goal is to repay most or all of the mortgage as I want no uncertain financial obligations on retirement.


#12

Potentially more than the sum of all remaining interest! Some contracts state that the compensation for early cancellation is to be computed as a difference between your mortgage rate and “Kapitalmarkt” rates for remaining duration. And as the latter are negative yielding currently that means you’d owe more money to cancel than to stick with it.

You can normally convert LIBOR into fix at any time, so no reason not chose 100% LIBOR if it’s cheaper than a fix. Which is not the case however, short term fix is cheaper than libor, so you’ve been had. Mixing contracts of different durations is VERY bad, you won’t be able to shop around when the shorter contract runs out and will be locked in to the same bank or forced to pay cash


#13

There were no fixes cheaper than LIBOR back in 2015. And there’s a very good reason why I have 9y fix instead of 10y - my contracts run out at the same time. My LIBOR is renewed every 3y.

I should add, by the time you know you want to convert Libor to fixed, the bank will have already increased the rates for fixed mortgages.


#14

And how do you explain this? also the variable rates are much higher then the fixed ones which makes no sense to me…


#15

That’s an interesting question. First of all, I didn’t find examples of 1-3 Fest Hypo being lower than LIBOR. They are, at best, the same.

Secondly, the Variable Hypo you can quit anytime (with 3/6 notice period), but the LIBOR Hypo you apparently have a contract for e.g. 5 years and can’t quit earlier without a penalty fee. But still, the LIBOR is like 1% and the Variable 2.5%, the difference is huge. Wonder if anyone could explain me why would decide for it.


#16

Here’s an example.
https://hypomat.glkb.ch/online-hypothek/hypothek-aktuelle-zinsen?0

As far as I know there’s a caveat - none of the online mortgages will finance more than 65% of the property value. The same with BVG’s. The insurances on the other hand will advertise low rates, but will often only give them to you if they can suck you into other insurance products. Also, splitting the mortgage into 1st (65%) and 2nd (15%) at different rates is common.

And yes, LIBOR mortgages come with a fixed term, in my case it’s 3 years. You can switch to fix only on renewal date, but fixing the rate is possible in advance at an additional cost.


#17

They make you pay an additional premium for the freedom to leave earlier…:flushed:


#18

Here the 2y is 0.1% cheaper:
https://moneypark.ch/en/mortgage/current-mortgage-rates/


#19

They also give a 5y fixed mortgage for 0.6%. That’s just so incredibly cheap… It really sounds too good to be true.


#20

Moneypark is the biggest independent mortgage broker in Switzerland. They most probably show best-case scenarios rates in the page but I suppose every other provider does…