[Advice please] Fixing Mortgage rates over this period

Hi all,

I would like to hear your opionion and advice about decision to fix mortgage during this period.

Situation: contract signed, downpayment done. Apartment still in construction and expected to be released November 2023.

The mortgage consultant called me last week, to inform about the need to start thinking about fixing the rate as he expects the rates going up more.
Since then, I start monitoring the rates of 7 banks (just bookmarked the web-page where % rates are published).
What I understood, is that whatever interest is published, this is only indicative as many faction could influence the real rate a bank will offer (e.g. date of mortgage start, place, affordability etc. etc.) - however, this practice helps me to keep a close eye to the evolution of the rates.

As we speak, the delta between 5-7-10 years period, is very close (e.g. 0.1 - 0.25). The financial institute I am currently in, based on last Friday’s rates, offers respectively 3.11 / 3.10 / 3.12
Just a week ago, same was offering 2.83 / 2.86 / 2.92. This raise could be a direct effect of the recent decision from SNB, I guess.

Now, given nobody has a crystal ball, it’s basically about betting. But at least, I would like to ask around if someone more into the topic, could provide useful insights, or even a different PoV.

My idea is not to be in a hurry now to fix the rate (yes, they can go still up, but my feeling we’re now at the peak). I am thinking to still monitor the market for some weeks and then evaluate.
Fixing the rate now, with my current institute, will mean no easy-way out. I was also evaluating the option to go with another bank, should a better offer would come, but as of now between banks, difference is very little (e.g. 0.1 - 0.15 %), which can be easily absorbed by the penalty the bank will ask, and the additional costs to the notary.

Months ago, when I started to evaluate the mortgage (when interests were around 1.5%) , I was tending to consider a 10-year 1-only block fix rate.
Now, despite I still consider to have 1-only block and do not split (to avoid continous lock-in with the bank), I reconsidering to scale down the period to 5 years. Why? Just gut feeling: maybe in 5 years rates could shrink a bit (but also the way round) and at the time of the re-negotiation I could bring some money in to request afterwards a smaller amount.

  • Would you advise to block rates ASAP, or still monitoring the trend in the next period?

  • Which period would you consider as ideal, given the today’s condition, 5-7-10 (or differently)? Would considering a combination of fix and SARON an alternative approach?

Many thanks for your time
Best,
Cappuccio

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There are also for example pension funds or VIAC that give mortgages. So think about alternatives.

I wouldn’t go for more than 1 block. And I would probably take the shortest possible term. Not Saron, to still have fixed costs short term, but it still should give the lowest currently possible interest rate. Don’t time the market. And if current rates are higher than 2-3% expected return of my pension fund, I would take some money out of 2nd pillar and use it for a partial amortization.

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I would choose the SARON and look for alternative like VIAC as said above.

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A good source for mortgage rates is https://www.hypotheke.ch/ although not 100% of the providers are participating (and I think it’s only in german).

I’m also agreeing with @Dr.PI that if you don’t want SARON the best way is to pick a short term fixed mortgage during times of high interest.

Also keep in mind that if you do more than one block to make sure that the mortgage blocks still end on the same day. If you have different blocks with different ending dates it’s almost impossible to change the mortgage provider and they do this for exactly that reason.

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Hi Dr.PI,

Thanks for your valuable inputs. Today I contacted M*P (not sure if it’s allowed to expressively mentioned them), to get some more insights about their services. Not sure if it makes sense to involve a 3rd party to support me with these checks (knowing their fee is c.ca 900 CHF). They also mentioned there are pension fund which do likely offer rates to be evaluated.

About the block, I was thinking to have 2 blocks but actually I’m not even sure if that makes sense, given the current situation. I do second your view of having the shortest term (I was thinking 3 or 5 years) and then see how the market goes.

Currently, I’m pledging 1/3 of my pension fund (not my option, it was requested by the financial institute to guarantee the affordability). I do still have some cash (and also the 2nd pillar possibility), but the consultant of the financial institute, is still keeping advising me to do not increase the amount of downpayment, as he says these money can be invested somewhere else. This is the part of his story-line which I do not fully agree: this move would have made sense with % of 1.0 or lower, but now with an average of 3.0, it should be more convenient to put even more money as downpayment to reduce the mortgage amount - what is your view on that?

Thanks a lot
Cappuccio

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Hi Yanikuza,

Thanks for your inputs. I am also looking at SARON, altough I read in the forum too it is expected to see increases on SARON which could make this option not super convenient as it was in the recent past, against the fix rates.

Many thanks
Cappuccio

Hi Logitacher,

Thanks for sharing your PoV and the resource - I’ll take a look into it.
Actually I’m not against SARON, I’m just a bit worried about the unpredictability of the up&down of such option. For instance, the financial institute where I have my current mortgage option, does have SARON but only limited to 30% of entire amount. Not sure if other banks/insurance do offer the SARON differently (like all amount).

Thanks also for your point about the lock-in with the different block dates, this is well noted. This was indeed one of the advise of the consultant, which did not encourage me to go with blocks (but, from the other side, to block rates now and for 10y).

Best,
Cappuccio

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3rd pillar - yes, 2nd pillar - no. The days where one could have a mortgage at 0.75% while earning min 1% on 2nd pillar are gone, maybe forever. Even if markets make a huge come back, you won’t get 20% as an interest. Just check what was the maximum and average interest credited to your 2nd pillar last years.

After all it is again a question of assets allocation. How much is the net worth of your property and the mortgage debt? Do you want to maybe earn 2-3% on your second pillar while paying definitely 3.5% on the mortgage for 10 years?

Furthermore, it could be a completely legal backdoor to withdraw your 2nd pillar ahead of time (if I understand correctly): withdraw pension fund money in one year for property amortization, take a higher mortgage another year. If you want to do this, short term mortgage is also preferable.

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The catch is that it’s not a given that rates, as they are now, can be considered as “high”…

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First of all, congratulations on securing a property, it’s always a big step!

To help you thinking through the situation:

  1. Do you have enough cash flow / earning to absorb mortgage payment fluctuations? (You mentioned in your post about financial considerations on locking 1/3 of pillar 2 from the bank)
  2. Do you subscribe the mortgage yourself or together with your partner? And does your partner have enough earnings?
  3. Would you be able to afford a higher monthly payment if not you were to be made redundant (getting approx. 80% of your salary for 2 years)?
  4. How big your cash pot? How long can you pay your mortgage quarterly payments by only using your cash pot?
  5. Do or your partner expect a good salary increase coming (promotion)?

Those questions can help gauge your fear level while understanding how much you can afford. It’s both elements that matter. You don’t want to stress out when you get a Saron and then you are struggling to pay. Saron is good over long term but could be bumpy in the road.

Personally I closed earlier in the year 7year fixed at 1.27.

If I were you and I wouldn’t huge room of cash flow / earnings but still some savings. I would opt now for 5y fixed. I did in the past 3 years for a property overseas, it worked out well as I got lower interests in the renegotiation but 3 years flew so I told me myself I would need something for longer.

Regarding fixing the rate. Trend does not look in your favor, albeit it fluctuated over the last few months.

Either you lock now. If not, choose a lower point in the curve and when this is hit (if ever), then lock it! At least you apply some rationale based on your affordability.

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I use for my mortgage 3 parts:

  • 50% SARON 3Y
  • 25% 5Y
  • 25% 10Y

all with VIAC (currently 0.6, 2.35 and 2.6).
The reasoning is that I hope for lower rates with Saron, but I hedge the risk with fixed rates for 5Y and 10Y.

If in 5Y the rates are very low, could change that one to Saron or fixed for longer. If in 3Y the rates are very high, will use some pension funds to pay more from the Principal.

So, I wanted some flexibility with the amortization and rates, but I trade off some freedom in choosing another lender for the next 15 years.

I hope it helps!

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Hi SteveDB,

Thanks for your message and your useful indications.

Please allow me to address the points you kindly mentioned, merging the outcome.
We do not have consistent cash flow left to absorb heavy fluctuations. Meaning, the one reserved, will be dedicated for furnitures and so on. The reason behind the 2A pledging was drive by suggestion of the consultant to reduce as much as possible the downpayment and using the pledging to support that. To give you the example, the dossier they made us on March, 2022 consists on:

++1’120’000 Cost of apartment + 2parkslots
– 260’000, downpayment
– 20’000, 3A promise of payment
– 80’000, 2A pledging (due to check of sustainability)
– 840’000 Mortgage

In theory, we could still have the chance to inject more cash, to reduce the mortgage amount (max 100K CHF), before considering to fully withdraw the 2A, but I was wondering if it really makes sense :confused:
Family with only one income (mine), not expected to have consistent increase of salary. Mortgage subscribed with both my wife and myself.
Assuming fix rate raises to 5% (equal to 3.5K monthly interest rate), we should be still able (without be extemped by a consistens saving sacrifice of course) to deal with that.

I’m still waiting the consultant to come back with the Interest Tax fixing offer. Monitoring regurlary the daily rates published, considering the forwarding price ( assuming 0.20% having +14 months to the apartment readiness), I can expect an offer of 3.50% (this my simple and mere assumption). Actually, based on the info I have, there is not tangible difference on 5-7-10 years (delta of 0.10%). There is in case of 3y (compared to 10y, delta is 0.25%). I’m just refering to the figures available in the website of the finantial institute I’m currently in.

My gut feeling now, tell me to consider a short window (e.g. 2-3 year) and eventually a combination with SARON.

Example _1:
840’000 Mortgage Request
– 600’000 3Y Fix at approx 3.20 (if blocking today including forwarding rate). It would be approx. 1’600CHF /monthly interest rate
—240’000 3Y SARON. Margin 0.80, yesterdays’ index 0.40. Tentative simulation and delta: 1.20-2.4. It would be approx. 240-520 CHF/monthly (or 720-1’400, considering quartely)
_Consideration: This would end up to an approx. 1’800-2’120 CHF monthly expected rate (assuming delta of double increase of today’s SARON).

Example _2:
840’000 Mortgage Request
– 840’000 3Y Fix at approx 3.20 (if blocking today including forwarding rate). It would be approx. 2’240 CHF /monthly interest rate
_Consideration: potential savings considering the lowest and highest (just mere and simple calculation, fork can be bigger up and down) with SARON option, is respectively 15’580 and 4’320, in a 3y window.

Why I’m considering a short windows.
Factor 1: % not predictable fluctuation. We do not know how the SNB/BCE/FED will react in the next months. Interest are currently raising because to stop to the stimulus they facilitated with the low interest points. They can go up, likely. This is a calculated (sort of) risk I can take.
Factor 2: by having +14 months ahead, not all banks/PF do offer a quote, therefore I will be cutting out potential interesting offers. As well, by blocking so ahead, forwarding rates are applied (the 0.20% indicated before)
Factor 3: by blocking at 2 year, as an example will give me the opportunity to do not be in a rush to block rates todays (or following weeks/months). Altough I take the risk of posticipating, example June 2023, I can bear the risk of increase of interest (e.g. from 3.06, netto of forwarding) to 3.60 (where the forwarding won’t be applied, as many banks offer 3-month period of grace where forwarding is not applied): 3.20 vs 3.60 is a difference (assuming 2y fix) of 6’720 CHF. I can afford this “risk”. Same principles goes for the way-round, assuming a decrease of interest from 3.20 to - just an example - 2.60: in this case, the expected saving would be circa 10’000 CHF
Factor 4: In the case of 2y fix, after 12 months I can evaluate again the condition of market offers. This time I would get potentially more offers (equal to more options and savings opportunities). Depends on how the situaiton in 2024 will be, I can sit again on the uncomfy chair as today and re-do all these calculation.

I’m coming to these conclusion, after looking at the big difference simulating 1.0 vs 3.0 %, based on all my data (including tax implications, deductions and so on). it’s basically a difference expected to be around 12K CHF/annum. Multiplied by 10y is evident how big the disadvangate linked to this increase.

I’m a not a financial expert, therefore the points above are just coming out after some overnight thinking. Please do let me know if I miss other parameters (or even the famous elephant)

Thanks and best regards,
Cappuccio

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Hi arheom,

Thanks for sharing your experience. I tried to get some further insights about VIAC. It seems I cannot apply to that, as the apartment is still in construction.
Of course, whatever partitioning of mortgage was applied in the previous 6-12 months or last year, are not reflecting the today new situation.
Altough, as correctly mentioned by Zerte2, we should not tend to consider the today’s rate as high, because the real high (looking at the last 15y windows) can be even more. On 2008, 10yfix was 4.6%

Best,
Cappuccio

It depends more than ever on the moods of the central bank…
At some time the financial stress will be too high (look, among others, at the share price of Debit Suisse :wink:); consequently the SNB will capitulate like the BoE did yesterday and put the fighting of price inflation in the background.

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What’s the reason to still considering Saron? Is inflation going away soon?

Because it’s the cheapest longterm as long as you have the cash cushion either saved or built up from low interest phases for the “high” interest phase as it is right now.

I didn’t see it a year ago, and I don’t see it now. There is a first confirmation that was not a bad call to go with a fixed 0.98% 10Y
Let’s check again in 1 year

@wavemotion well, yes and no, whether it was the right call financially speaking (peace of mind for 10 years aside) can only be evaluated after those 10 years.

Initially you were behind, now you are ahead, but it’s only over the length of entire duration that you will see the definitive answer.

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Plus a good outcome does not identify a good decision.

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Confirmation or not, this is very good. It’s around the risk-free minimum return of 2nd pillar. I would take the mortgage rate <1% anytime for any duration.