I do not think that this is necessarily true, banks can completely hedge this risk with interest rate swaps. Because of that, you can also look up the implicit margin by subtracting the swap rate (with the same duration) from the rate of a fixed rate mortgage. In my experience, these margins are not higher than the ones of SARON mortgages.
A SARON mortgage is cheaper than a fixed rate mortgage if the avg. rate is lower than the current market expectation over the time span, which is off course very hard to predict.
Costs / any premium (e.g. a term premium) are incorporated into the swap rate, the bank pays this fixed rate to another party and receives SARON payments for it. So yes, I guess there is some hidden hedging cost within the swap rate. No idea how high that is, but it looks like there are researchers that try to estimate it using various (non-trivial) techniques, e.g.: JRFM | Free Full-Text | Term Premia in Norwegian Interest Rate Swaps
As mentioned, in practice long term mortgages are implemented with swaps. This should be relatively efficient as the market will match those who want to swap fixed for floating and vice versa with each other.
And for every market participant who is betting on higher future rates (or hedging as you call it ) there’s another betting on lower future rates (or who are also be hedging against their own floating rate liabilities).
Whether one is ultimately more expensive than the other to the homebuying consumer, I don’t know. I guess this is also a competitive market so the banks can charge what they can get away with.
More precisely, the market thinks inflation pressure will subside, and therefore SNB will lower the interest rates vs today.
Inflation subsiding often happens during a recession but it is not always the case. Hence economists currently discussing whether or not the US Fed has pulled off a soft landing in the US
Hello all, and sorry for the off-topic a bit question but how the interest rate of Saron is calculated? I understand there is a portion of the compounded overnight Saron interest rate over the last three months (where and how can I find that?) plus the fixed margin % (around 1%) that you negotiate with the bank, correct?
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?
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.
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…
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.
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.
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.
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.
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.
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…
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.
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.
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) there’s another betting on lower future rates (or who are also be hedging against their own floating rate liabilities).