Decision for mortgage renewal

Real Estate
1

Dear all,

I’m mostly a reader here, I don’t post a lot as I find most of my answers already :slight_smile:

I started a mortgage 5 years ago. Half the amount 10 years, the other half at 5 years. As you guessed it, I’m near the end of the 5 years so the bank contacted me with the following offers:

  • 5 years: 2.3%
  • Saron (currently around 2.7%)

I’m turning to the wise people here to help me decide.

Other infos: The mortgage total is around 500k. I do have personal savings. Family with 2 kids. Early 40s.

Thanks for your help and wisdom!

2

The bank thinks Saron rates will go down in the future, that’s why the fixed offer is lower. I’d go for Saron trying to lower the margin, which currently at ~1% is pretty high. But I am not you :slight_smile:

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5y is possible below 1.9% (if your credit risk rating is not complete shit).
Saron margin 1% is also not very competitive.

But no surprise here, you did what I never recommend: having two tranches with two differend time frames OR at least you have an exit strategy (e.g. bonus in order to be able to pay back the mortgage). Since you are stuck with the bank, you have two options:

  • accept their offer
  • paying back the mortgage or negotiating at least and say, otherwise, you will repay the mortgage (“banks hate this trick”)

Anyway: there is no right or wrong - if you rely on analysts, the Saron rate can decrease.
But you can also take the 5y and ignore the interest rate market and live your life.

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4

can someone expand on why you can’t switch banks for one of the tranches? I heard this a couple of times, but I was wondering why that is.

5

The property is the collateral. Due due compliance resons, the bank are always assuming worst case scenarios.

Therefore let me give you an example:

Purchase price: CHF 1m.
Mortgage: CHF 800k (Bank A in first rank: CHF 400k. Bank B in second rank: CHF 400k).

House prices are dropping, new value: CHF 500k. You lose your job and you get sick. No possibilities of repayment because the falling stock market has erased your portfolio. The bank will sell the house for you.

First bank gets their mortgage + interest fully back, whereas Bank B loses most of the outstanding debt.

It is possible to have a subordinated financing, but the interest rates start at 6% p.a.

A bank will also grant a loan in the second rank, but with the requirement, that you have to transfer the previous loan at bank A after the expiration date to bank B. But this does not help you, since you are stuck in the same situation: you have to accept the offer from bank B, if you are refinancing the first tranche with them.

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Thanks, in the example with two tranches of different durations with the same bank, the longer lasting tranche is of first rank while the shorter tranche is usually second rank then? Is this done in practice with two separate mortgage notes (Schuldbriefe)?

Meaning that you would need to find a bank which would accept debt in second rank, and due to their low risk appetite, almost nobody will take this gamble? And that’s why you can’t switch banks for the earlier expiring mortgage?

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Also since their gains aren’t as attractive. Banks want you to have more than 1 tranche to lock you in as long as possible.

Double check that if you take a saron that there is no restriction to come back to a fixed if you want…you want to avoid them forcing a minimum duration on you which makes you have to wait another cycle to merge the tranches.

Perso: I’d take the 5year rate, merge the tranches and be ready to begin to negotiate better in advance of the next expiration with the possibly to jump banks.

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Theoritically you are not locked up and you can always refinance with another bank. Of course this would entail breakage cost which normally are high however I would expect that the 10 year term secured 5 years ago to be well within the money now. This means that OP could leave now and go to another bank potentially without paying any money for breaking.

Of course that would mean leaving money on the table (since they will lose the assumed low mortgage for the remaining 5 years) however that would be the case in case they had fixed for same 5 year term their whole mortgage.

Last, I am afraid that threatening the bank with leaving would yield no results since the bank should be happy to get money back that are earning low returns and redeploy them to another project with higher returns (given the current status of the market).

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Well but that would be at the end of the mortgage, so the choice of the bank is between making a new business (at current prices) or not, so one should still have a bit of leverage threatening to leave.

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Sure. Sorry if I considered that part of my reply obvious: yes, can change banks whenever you want if you break the contract and pay the penalities. My point was made assuming not breaking the contracts.

Though not sure why you’d want to break a good 10y mortgage to renégociate a higher interest mortgage now though…I definitely think consolidating in 1 tranche (avoid this whole discussion) is worthwhile but I wasn’t implying that you should break contracts today to do it with high interest rates :stuck_out_tongue_winking_eye:

Edit: like @Giff says, you can more easily leverage your bank agent on what’s in hand (mortgage, investments, whatever). Self interest is a powerful motivator, and I’m only speaking from my own experience, I’m sure there are many others.

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Do you only need to pay the difference in interest rate? From what I remembered, if you break the contract, you have to pay all future interest - not just the difference.

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Yes this is my understanding as well, it is the full rate minus the reference rate, however given the previously low rates I would not be surprised if the all in rate is currently below the reference rate…

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Sure, I also mentioned that one will probably be leaving money on the table. However it is a quick mathematical exercise to compare the all in under the new financing vs the all in under the renewal and the running tranche of the existing financing…

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Not sure you kept the context of my first post which was “take a 5year now to merge and renegociate in 5years” ….I get your new context of breaking contracts now and renegotiating, but in the original context the main point was renegociating in 5years…so I get that you are competing the 2 options now, but I was projecting to the next step….where you can’t know what the rate will be to evaluate if it’s a better deal now :wink:. You can extrapolate a break even point but just an estimate.

No worries, different sides to the same coin :beers:

15

Ok, following the messages I went for 5y fixed and in 5 years I will merge and re-negotiate with 3-4 banks. Thanks!

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A post was merged into an existing topic: Mortgage rates in Switzerland