10y fixed vs libor


#21

Real estate market correction in Sweden 1992. At the peak the interest rates were at 500%…very rare event though


#22

You can only finance up to 65% property value (instead of the usual 80%). Other then that, these are real rates.


#23

That’s still great. Imagine you save up 200’000. You take a loan for 400’000 to buy a flat worth 600’000. You will pay 2’400 interest per year, or 200 per month! You save rent worth 600’000 * 3% = 18’000 per year, or 1’500 per month. That’s an annual return of 15’600 / 200’000 = 7.8%. Not bad!

Of course, there’s a trap. If the interest rate goes up to 3%, you will pay 12’000 interest per year. Your 200’000 only squeezes 3% per year. So you decide to sell. But the cheap loans are gone, so the demand has sunken, and nobody will buy your flat for more than 500’000.


#24

This is why I currently amortize directly - I want to get down to 65% ASAP so I can shop for best rates.

For a 600k apartment, you need to calculate another 400 CHF/month for management/renovation fund etc. and another 300 CHF/month in tax (Eigenmietwert) so your effective rent savings are less than you estimated, more like 1000 CHF/month.

If a prospect of 3-5% interest rates pushes the risk too high for you, you can always fix the mortgage for longer, but that obviously exposes you to whole other kinds of risks.

For me, the effective return is 6.25% (excluding amortization).


#25

Renovation - I agree, but what do you mean by management? Mind you, I calculated the rent of 1’500 as Kaltmiete, without Nebenkosten, as for both scenarios these costs are similar.

True, I forgot that. Eigenmietwert is a theoretical income that you get by being your own tenant, but you can deduct the interest. So effectively you would need to pay your marginal income tax rate on that 15’600, which indeed is about 300 per month.

But if we deduct these costs, we arrive at 8’000 savings with 200’000 locked as collateral. That’s a return of only 4%! How do you arrive at 6.25%? I thought my assumptions were pretty realistic.

It also has to be mentioned that if you invest that 200’000 otherwise, it might also trigger income tax. Unless the main return is capital gains.


#26

This is worth some thought. My effective costs as per yearly statement are 400 CHF/month. The Nebenkosten for rental apartments in same group of buildings is 220 CHF/month. The difference must in the renewal fund and/or the real Nebenkosten are underestimated.

The list of things on the statement is rather lengthy with water, heating, lifts, upkeep of communal areas and so on. A small fee for “Verwaltung” of all this is also there.

In real numbers - This is 1680 CHF rent, 220 CHF nebenkosten, 120 CHF garage spot.

Price to purchase 608’000 CHF (inclusive of garage spot).

I’m at 80% mortgage, so my collateral is only 121’000 CHF. Then again, I have to amortize down to 65% and I’m not sure how to account for that in return calculation.

edit:
To further elaborate on tax implications:

My Eigenmietwert is roughly 20’000 CHF.
Most of the fixed fees are tax deductible (basically all of it excluding heating and consumed water). This is -3000 CHF.
Interest is also deductible, let’s say this is -7000 CHF/year in my case.
Marginal tax is therefore to be paid on 10’000 CHF only.


#27

I pay 2000 + 300 Nebenkosten. The Nebenkosten do not include renovation or maintenance, so they have to be hidden in the Kaltmiete. Here a quote from Mieterverband:

Die Unterhalts- Reparatur- und Verwaltungskosten sind von den Nebenkos-ten zu unterscheiden. Unterhalts-, Reparatur- und Verwaltungskosten muss der Vermieter zwingend übernehmen als Gegenleistung zum Mietzins.

OK all clear. Well it seems simple to me. When you amortize that additional 15%, you will increase your collateral from 121’000 to 200’000. Then you will need to compare your annual savings to this number. And just by rough calculation, it should drop to 4%. Currently you achieve a higher percentage, because of higher leverage (4:1, and in the future it will drop to only 2:1 loan/collateral).


#28

Guys, don’t forget one-off costs which goes to a substantial amount in the first years (transaction closing fees and so on).

I know they had done a case study for canadian market here (which is obviously different from the Swiss market, but the article is worth reading anyway).
My point is Real estate is notorious for two things :

  • that is one of the few markets where participants happily go leveraged with the bank’s benediction
  • there are a lot of hidden fees which add up quickly, contrary to indexing.

#29

I think this all depends what you buy and where you buy. Whether it’s a house or an apartment, new build or second hand, modern or in need of renovation, off-plan or individually designed, etc.

In my case (off-plan new apartment) the only extra costs I can think of were the notary fees (Notar, Grundbuchamt, Schuldbrief), total 5740 CHF.


#30

Where did you find this information? On the webpage they say one can finance up to 80%


#31

This was the case when I was shopping for mortgage in 2015. Online providers would only finance up to 65%. Perhaps this has changed now? MoneyPark is an intermediary. They write: “The displayed interest rates are the best rates currently available and professionally renegotiated by MoneyPark. Your personal interest rates may vary depending on LTV, affordability, mortgage amount and the location of the property.”.

They still have this on their website. Perhaps no longer valid?


“Belehnung: Maximal 65% des Immo-Werts sind möglich (1. Hypothek).”


#32

That’s a good point with all the extra charges, but even if we ignore them, by an extremely low interest rate of 0.6%, and and LTV of 65%, the return is only 4%. I guess I’m good with renting.


#33

What if you also get a return on your capital with the property increasing in value? I know this may not be so obvious in current environment, but the property market crash did not materialize despite prices on an almost constant rise since 1999.

Even if by coincidence, I might have lucked out.

My 2015 built apartment was effectively 4550 CHF/m^2. I’m now seeing similar new builds in the area sold for 15-20% more.


#34

Personally I prefer LIBOR, at least if it means that you are not tied in with the bank for a fixed period on that deal (my bank had a tie in period for 3 years - which was very bizarre to me, so I went for a 1 year fixed instead). In my opinion it is best to not fix your mortgage for the following reasons:

  • fixed rates are based on projections by the bank’s credit department. The fixed rate proposed by the bank is likely to be higher than the increased LIBOR the bank is expecting for that (1 year, 5 year, etc. ) period in the future.
  • central bank are better at managing rates that they used to be and therefore I believe (but I may be wrong) that rates may rise but it will not be sudden so you could then take a fixed rate
  • life stays unpredictable and some industries restructure their business and people have to move to other part of town, cities or countries, selling your home without mortgage penalties would be a plus

#35

Most LIBOR contracts have a multi-year minimum contract term so it’s just like fix but with more steps & risk

No no no, they don’t take on such massive risks if these projections turn out to be wrong. They’ll secure your rate with swaps when you sign or straight up sell off your mortgage via Pfandbriefbank or something and just pocket some safe 1-2% difference.

Every interest rate “projection” I’ve seen published by a bank anyway has always screamed RATES ABOUT TO GO UP BUY INSURANCE NOW


#36

I now know I should have taken LIBOR, but as a sole earner it felt reasonable to buy some relative safety. I took 1/3 LIBOR and 2/3 fixed 9y.

Still, the numbers are easy to calculate. In my case the total premium over 9y duration comes out at around 2600 CHF before tax and under 2000 CHF after tax as compared to going LIBOR only. Hardly a catastrophe. I’m burning at least that much in all other insurances in a single year.


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