How fixed is a fixed mortage?

Real Estate
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Hi everyone!

Quick question to everyone who subscribed a mortgage in the last few years: is there a clause in the mortgage contract to adjust the fixed interest rate? And if there is, what are the conditions?

A colleague of mine told be that it is very common nowadays and I’m a bit confused: if the bank can set a higher interest rate if the market conditions change (for instance: interest rates go to 5%), then is it really a fixed mortgage?

I know that the bank can cancel the mortgage any time and demand that you cover the principal, but in that case, at least you can change banks. Not that other banks would give you better conditions but at least the bank that screwed you over doesn’t get your money anymore…

Is it also regulated in the contract that they can adjust the interest rate if you change jobs (and get a lower salary) or reduce to 80%? At this point, I’m starting to doubt everything haha…

As we are currently considering buying an apartment, this is highly relevant for us. I’ll find out eventually when I get offers from banks but I would rather avoid the issue for reserving a place and then cancel because we find that the contractual conditions of mortgages in Switzerland are such a joke…

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Hey there! I have seen a fair share of mortgage contracts in recent years, from my experience:

(1) Never seen a clause that would allow the bank to adjust a fixed interest rate. Only once saw one referring to extreme market conditions which was explained for use in an extreme inflation scenario (and that contract was not signed ultimately).

(2a) “I know that the bank can cancel the mortgage any time and demand that you cover the principal”: Not true, would defeat the purpose of a fixed mortgage.

(2b) “can adjust the interest rate if you change jobs (and get a lower salary) or reduce to 80%”: No such thing exists. They evaluate your risk before signing (incl. career progression and risk of ending without a job), after that no adjustment is possible. I heard of a case where they tried to force lender to sign an insurance that would cover mortgage if income source is lost, but that was a very special case (employer announced heavy restructuring and layoffs just days before they wanted to sign contract, ended up with another bank that was not aware of this or simply did not care).

(3) What is common nowadays is that they will give themselves the right to sell the mortgage. They are very keen on keeping it due to bank liquidity regulations, and are equally keen to not give you special conditions (as that would also prevent a sale). But even if your mortgage ends up in someone else’s hands, they will have to adhere to agreed contract.

In short: I question if your friend has ever seen a mortgage contract…

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What bank can do is re-evaluate the value of your home. If it less then when you signed up the mortgage, they will demand to cover the missing capital. Maybe this is what your friend thought of? Anyway they won’t do it anytime, but mostly if you engage with them or something bad happen that would lower the price of an entire city /region.

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Thanks for your input! I hope that you are right!

I mentioned this item during my discussion with MoneyPark and they basically told me “Yeah, the bank will always have a backdoor. The only reason they would have to not cancel your mortgage at 1% when rates are at 5% is to avoid damage to their reputation”. But I’m discussing this specific issue with him again tomorrow, as he told that he “read more on the subject”, whatever that means…

I found this, but I don’t know how reliable it is:

Einzelne Banken formulieren in ihren Verträgen ein Kündigungsrecht für Festhypotheken. Dieses Kündigungsrecht kann die Bank dann anwenden, wenn der Hypothekarnehmer z.B. plötzlich ein schlechteres Einkommen hat. Deswegen: Kleingedrucktes sorgfältig lesen. Denn die meisten Banken verlangen auch dann eine Vorfälligkeitsentschädigung vom Kreditnehmer, wenn die Kündigung seitens der Bank erfolgt.

So not only some banks appear to include a clause to cancel the fix mortgage, for instance, if you earn less, but you also have to pay them a cancellation fee. It’s probably not that common though…

I will post an update tomorrow after I discuss with MoneyPark…

EDIT: I found a mention of the interest rate adjustment clause here:

Ebenfalls nicht unbedenklich ist eine Klausel in vielen Rahmenverträgen, die besagt, dass die Bank oder Versicherung auch bei Festhypotheken während der Laufzeit Zinsanpassungen vornehmen dürfen – gegeben dem Fall, dass eine stärkere staatliche Regulierung dies notwendig machen würde.

So again: seems possible, but not as common as my colleague said… Or maybe such clause never existed in the first place and they are just making this up to scare people into buying their services… :face_with_monocle:

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Alright, I just got off the phone with the MoneyPark adviser. He clarified a few things:
The Rahmenvertrag can be canceled anytime. But not the mortgage. The Rahmenvertrag is the contract which regulates that the bank is willing to give me a mortgage. It doesn’t really make sense to me… maybe someone more versed in the legal language could enlighten us? Here is a typical wording of this clause:

Der Rahmenvertrag kann von beiden Parteien jederzeit per sofort gekündigt werden. Nach der Kündigung des Rahmenvertrags werden ablaufende Kredite nicht mehr erneuert und keine neuen Kredite mehr gewährt. Vor der Kündigung vereinbarte Kredite bleiben von der Kündigung des Rahmenvertrags unberührt; für diese gelten bis zu ihrer Rückführung die einschlägigen Bestimmungen des Rahmenvertrags weiterhin.

Now regarding the changes in interest rates, it doesn’t seem to be a typical clause. But the clause that a new Tragbarkeitrechnung can be performed anytime is always there. The adviser said that a bank would never do that if you pay your interest regularly etc. because it is work for them, but I’m pretty sure that if the interest rates go to 3%, they will try to find each and every possible way to cancel the contract…

Here is the wording of a typical contract:

Ausserordentliche Kündigung: Die Kreditgeberin ist berechtigt, sämtliche unter dem Rahmenvertrag gewährten Kredite jederzeit mit sofortiger Wirkung zu kündigen, wenn
[…]
°die Vermögens- oder Ertragslage des Kreditnehmers nach Einschätzung und Ermessen der Kreditgeberin wesentlich geändert hat;
°die bestellten Sicherheiten nach geschäftsüblichen Beurteilungsgrundsätzen keine genügende Deckung mehr aufweisen (der Entscheid, ob bestellte Sicherheiten noch eine genügende Deckung aufweisen, steht im alleinigen Ermessen der Kreditgeberin).

Right now, my wife and I are both working 100%. But my goal is start reducing to 80% next year. And 70% the year after. If we ever have a baby, one of us (probably me) will most likely take a year off. In the perspective of FIRE or at least part-FIRE, we don’t want to have to maintain our current level of revenue for the next 20 years…

Am I being paranoid for strongly believing that in the case of a strong increase in interest rates, the bank will try to cancel a low interest mortgage at all costs?

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(1) Indeed I have seen wording referring to “regulatory changes” that would allow a bank to adjust conditions (or might have been to cancel early on, don’t remember exactly). Bank confirmed in that case that this is in no way related to simple changes of the SNB reference interest rate. Given the political system/landscape in Switzerland, I don’t see this as a risk.

(2) Re-evaluation of your home’s value is absolutely a thing, but that is an entirely different aspect. In today’s market the banks are generally (slightly more) cautious and might set your house’s market value below what you actually pay, i.e. you will have to finance 20% + anything above their internal market value.

(3) “Einzelne Banken formulieren in ihren Verträgen ein Kündigungsrecht für Festhypotheken. Dieses Kündigungsrecht kann die Bank dann anwenden, wenn der Hypothekarnehmer z.B. plötzlich ein schlechteres Einkommen hat.”

Ha, it does exist! Would be interesting to hear which banks try this…

For both 2 and 3, consider reality: As long as you pay your (fixed) interest, the bank has no reason to call a perfectly served mortgage, as they must be aware you might not be able to refinance and they end up with the collateral/house.

The real risk you face is refinancing. You must fulfil then current regulatory requirements, where anything can go wrong, and you might just be out of a job right around that time.

(4) “Am I being paranoid for strongly believing that in the case of a strong increase in interest rates, the bank will try to cancel a low interest mortgage at all costs?”

Yes. Banks of course will have either refinanced your mortgage equally low, or due to lack of refinancing options the will simply not offer you a very long term mortgage. Additionally, you mentioned reputational risks yourself. If you want to be on the safe side, just avoid banks with those extremely unfair examples posted by you (“steht im alleinigen Ermessen der Kreditgeberin”!), and have your main account with another bank (if they are smart enough, suddenly receiving payments from the unemployment agency might trigger questions).

(5) “The Rahmenvertrag can be cancelled anytime. But not the mortgage”: That is standard, and if you would ask about risks of a LIBOR mortgage there would be many more things to consider (esp. as LIBOR will be discontinued, providing an excellent change for the bank to screw you over). For a fixed mortgage, the framework agreement is basically irrelevant.