Mortgage rates in Switzerland [2024]

Real Estate
24

Okay, so if my understanding is correct let’s assume current Saron rates are at about 1.7% plus margin interest rate of 1% (from the bank/provider) calculated on top you end up at 2.7% or at 1.717% with the Saron mortgage?
Also, when you get your first Saron mortgage offer will it be based just on the last three months compounded (estimation) but as soon as you will get your first real instalment of the intetest rate to be paid it will be different from the offer straight from the beginning, correct (as Saron changes every day)?

Sorry, for the newbie question, I am just struggling to get how can I calculate / compare fixed vs Saron mortgages… and I am reading lots of opinions in favor of the Saron lately and I am kind of confused…

So, in a nutshell if the Saron is 1.717% and you predict that interest rates will go down in the short/medium term would it make sense to go with Saron, correct?

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25

Same struggle on the calculations. Because I always see the reports base on the Saron rates and not with the bank margin

26

Margin from the bank is on the lent amount, not on the interests. So in your example, it would be 1.7% interest and 1% bank margin, total 2.7%.
A few years back, when rates were negative, you could see that quite well with SARON mortgages staying around 0.5-1% minimum.

27

That‘s why for me it makes absolutely no sense to go for a Saron mortgage by any means… but there was recently a post from Mustachian stating that it’s obvious Saron is the best way to go…

Am I missing / overlooking something here?

28

Do you compare just a short period of time? Like current rates with an inverted curve? Long-term fix rates come at a premium, but provide stability. Over decades, SARON should be cheaper. But it comes at a risk if rates rise sharply in a short time.
Long-term delays that risk until the point of time when you have to renew them.

29

Just read a statistic (US) that there was only one instance over the last 60 years where a yield curve inversion was NOT followed by a recession, time lag usually 6-18 months. This time the curve inverted during Q4 ‘22.

Then again, past performance…

30

My view is that banks include their forcasts when setting their fixed rate. The SARON rate is less risky for them (they get a fixed margin over whatever rate they get liquidity at), while fixed rates are more risky for them (their forcasts could be wrong) while being less risky for you (as you then have predictability).

Assuming you get competitive rates and banks are trying to be attractive, fixed rates work as insurance for you. You pay a little premium (what the bank wants to retain to cover their own risk) for more predictability. Statistically, you should on average be better off with a SARON rate if only pure costs are considered.

We only get to experience one serie of data, though, so our own experience is likely not to fit statistical data. If a fixed rate is low enough and offers security that can be leveraged elsewhere (either in quality of life/no worries or by taking a more aggressive stance in other aspects of our (financial) life), then it’s very well worth taking.

Another reason to take a fixed rate would be thinking we have a better forecast of where interest rates are going than the bank has and that we can beat them at that. I don’t think I do but some may.

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31

I have not seen many predictions of a recession for Switzerland, which was why I pointed this out. The economy is very different to US with strong exports and strong CHF which has dampened inflation

It could well be I am just not following the swiss financial news though.

32

True, although those exports may take a hit if #1 and #2 target nations (US and D) go into recession.

33

this comment has aged terribly

34

You assume a 1% margin which is ridiculously high. A correct SARON margin these days is around 0.5%. Long term rates are currently lower because of market expectations and if those become true the SARON rate will be 50 / 75 bp lower than it is today in some months.

Also keep in mind that SARON offers a certain level of freedom that a fix rate does not offer when it comes to being able to sell your realty without huge penalties or being able to switch to a fix rate at any point in time.

So yeah SARON might make no sense to you right now but it might make sense to others.

35

I appreciate though I don’t completely understand your comments to be honest…

Let’s be pragmatic guys we are not talking about decades of years periods but for a 10yr period.

You can get around 1.7-1.8% fixed interest rate for 5 to 10 years period.

For the Saron to be more attractive to that it should get under 1% (within the next 2 years) and stay continuously under 1% for the next 8 years… How possible is that to happen, maybe again I am overlooking something and never say never but to my opinion chances are 0 that a Saron will outperform a fixed rate in 5 years time…

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36

There’s a mis-conception that all SARON mortgages are fully flexible and repayable at any time. I was surprised to find this was not the case and some banks give you the SARON rate, but still impose a mortage term e.g. 5 year, 10 year etc. during which cancellation has the same kind of penalties as for a fixed mortgage. Do read the small print!

If you have very low long fixed rate mortgage, it is an asset and is easy to deal with as you’ll sell and transfer the mortgage to the buyer.

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37

Doesn‘t change anything about the fact that Saron will save you money longterm.

Or are you also digging up comments during bear markets about stocks having the highest expexted return longterm? Of course there will be shorter periods where this isn‘t the case.

38

In fact I had found (moneyland) only a couple of SARON mortgage offers that allow changing provider within a few months. That’s also why I am sceptical about SARON mortgages in their current form: they are supposed to be flexible, but in fact they are not.

39

Yes, but normally they gave you the flexibility to move to a fix term.

40

There are flexible SARON products, but you have to look for them e.g. UBS has their standard SARON offering, but then have something they call SARON Flex which has flexible repayment/redemption (and charge an additional margin over their standard SARON product) but even there they include a fee (penalty) for migration to another provider. With UBS acquiring CS, I doubt that mortgage offerings are going to get much better with the 2 big banks in Switzerland now becoming one.

41

While saving money is good, I think the rate is a secondary consideration to financial robustness. Now maybe for some of the super earners here it isn’t a big deal if you have to pay an extra 4k a month in interest payments because rates go up by 4% - you save a bit less and hope rates go down in the future.

But for many people, this could cause some financial difficulties and so they might need to fix to ensure they can meet their payment obligations. AND, I’d suggest that if the fix period doesn’t cover the entire life of the repayment (as common in the US), they should also consider their financial situation when it comes time to re-finance to make sure they don’t have bad surprises and ensure they built up assets elsewhere that could be used to reduce or eliminate the mortgage in case rates are higher than manageable.

We already saw in the US the bad impacts when rates reset higher.

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42

I wanted to expand on comments that I have made before.

I have started to write in how the situation with borrowing rates can be represented as a mathematical model in my mathematized theoretical mind, but have run into a lack of information about how certain things are actually working. Please read and help me if you are a pro and can help me to figure it out.

So, there is one interest rate paid when banks and other financial actors borrow money overnight: SARON. This is a “true”, unconstrained value, determined by establishing an equilibrium of offer and demand in a free market with a multitude of participants.

There are also swaps. These are rates which are applied when financial actors are borrowing money for a longer term and they are fixed for the whole duration. They are also “true” values determined by equilibria of offer and demand in a free market.

Now, the first question: what is the relationship between longer term swaps and the currently predicted evolution of SARON over this term? I can imagine following scenarios:

  1. There is NO built-in premium in longer term swaps.

The value of swap rate is determined solely from the predicted evolution of SARON. The exact procedure (should be something involving taking roots of compounded SARON over this term), is not important. What is important that in this scenario, if the prediction is correct, the total interest paid “step-by-step” in SARON rates will be equal to the total interest paid as a swap rate.

  1. There is a built-in premium in longer term swaps.

In this scenario, the lenders hedge their risk in variability of future returns AND the borrowers accept it. If the prediction of future SARON rates is correct, the total interest paid “step-by-step” in SARON rates will be lower than the total interest paid as a swap rate.

  1. Thinking about it again, I can even imaging a scenario with a built-in discount in longer term swaps: if the prediction of future SARON rates is correct, the total interest paid “step-by-step” in SARON rates will be higher than the total interest paid as a swap rate.

Now the question is: which one of this scenario is valid? I tend to think that due to the symmetry of the market (lots of participants want to lend and lots want to borrow), the symmetry of risk for both sides (either side might overpay or underearn) and market efficiency the scenario with no premium should be the real one. But I lack the knowledge at this part and hope that someone with a professional knowledge can clarify this question.

Many thanks for reading.
PI

P.S. I see now that @logitacher and @0xLambda had a similar discussion, but I don’t think that my question was answered.

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43

A fix rate only gives you visibility for some years but you can also face that kind of issues with a fix rate especially if the maturity of your tranche is at the top of an interest rate cycle and you need to renew.