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.
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.
Yes, but normally they gave you the flexibility to move to a fix term.
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.
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.
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:
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.
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.
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.
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.
If someone signs a SARON with a 10 year maturity or penalties calculated like a fix rate montage sorry but it’s a lack of research on their side (and I’m not sure this is even legal especially on the penalty side…), it’s just like signing a 3B product without understanding the surrender value calculation table.
Try to transfer a mortgage which is 100bp above market conditions with several years before maturity then we’ll see if this is that easy.
NB: I have worked in the Swiss mortgage industry for more than a decade and I see a lot of mis information in this thread, giving an opinion is surely fine but making wrong statements is another thing, I hope this forum keeps some form of self moderation.
I think you are confused. I was talking about transferring a mortgage below market conditions, not above!
That was part of my point here:
For me, this is a strong incentive to lock in low rates for as long as possible (ideally until the entire loan is repaid).
Though if you’ve already locked in the low rates and still need to re-finance at the end of it, at least you had them low all through the period when they climbed to the top of the interest rate cycle and no worse off than having SARON at the top of the cycle.
I understood but market conditions will not always evolve in your favor and it’s important to stress that a fix rate mortgage can also be a burden. Might have been a no brainer 3 years ago when you could sign a 10 year for 0.6% but go tell that to those guys who signed a 2.7% one 6 months ago and have to sell now because of some life events. As a side note one option to consider if you have a low rate mortgage before transferring it is to give it back to the bank as they might have to actually pay you ^^.
The debate between SARON or fix rate is not black or white unfortunately, important is before going for one or the other to understand whether it fits your personal situation and your risk profile.
But that’s exactly the situation this thread is talking about. Getting a 10 year fix at 0.8%. Then only way the market is going to beat that by 1% is of banks start paying you 0.2% to borrow money!
I agree if rates are 2.7% it is more debatable. Although 2.7% is still be no means a high rate.
Well this is an issue somewhat separate from financing. As everyone should be aware, buying a house is a long term commitment that comes with certain risks and your life situation should be in order (and perhaps insurance taken to cover some events).
Interesting question, as far as I know, all of these three scenarios happen (depending on the market conditions). In the paper I linked about Norway, there is this figure:
There is also data available on USD with similar results (from The term premium of interest rate swaps | Macrosynergy Research):
I did not find anything for the CHF swap rates, but my assumption is that this will also be pretty dynamic there.
Sorry, I would like to exploit the fact that you had already read these papers and pick your brain with a following question.
I guess they are talking about the realized difference between paying the short or long term rates, that came out post factum. In this case, the result is mostly the difference between past expectations and what had come true. You can see it: the premium is negative in 2020-21, during the period of very low interest rates as controlled by the central banks.
Am I right?
While it is interesting, it doesn’t help us to make a decision now. What I was wondering is if such a premium (or discount) is calculated into longer term rates from the beginning.
Say, a bank’s analyst says: we expect the “average” SARON over next 5 years to be 1.1%, so we are happy to borrow for 5 years at a fixed rate of 1.25%, giving 0.15% as a premium to the lender.
Not quite, they actually provide econometric model that decomposes the swap rate into the expectation of the short term rate and the term premium. So these models (and there are quite a few with different approaches / methodologies) could be used for what you describe.
Maybe banks do this analysis, I do not know that. On the other hand, why should they care too much about the term premium? As a bank, I would be happy to always make 1% risk free, no matter if the client chooses a SARON or fixed term mortgage. Sure, if I think the market is wrong and the term premium too high for some reason, I could give out unhedged fixed term mortgages with the chance to maybe earn 1.2%, but with additional risk. My assumption is that banks analyse their whole portfolio regarding the interest rate risk (as far as I know, they have to because of Basel 2 regulation). Based on that, they can decide what the optimal hedging strategy for the whole portfolio is.
OK, let’s assume now that there is no built-in premium in longer term swaps; or they are rather small or we cannot identify it.
That means that we assume that swaps are “true” values reflecting the predicted evolution of SARON.
Even if it is not the case, these rates serve as a starting point to determine the mortgage rates anyway.
Now let’s look at the data:
These are the reference, “true”, market-determined borrowing rates (under the assumption above).
The rates are suspiciously increasing after 6 years. I suspect it is the built-in premium.
Note that the best SARON margin is around 0.6%.
Huh. They are actually higher than the best mortgage rates…
So, this simple comparison shows that:
for the best advertised mortgage rates, the markup is not much higher than the best SARON markup.
The value of around 0.6% also corresponds to what was mentioned ones by @Cortana as a very good value.
the optimal duration for a fixed term looks like to be 4-5 years.
For longer durations, there are signs of the built-in premium in the swap AND the markups are getting larger.
Conclusion:
Always compare proposed fixed mortgage rate with the interest rate swaps to determine your personal markup.
I wonder if this dip could be due to banks passing on fixed costs of raising a mortgage and this being more expensive when spread over a shorter term and then reaches an optimum point before the term premium exceeds the spreading effect?
This is super insightful, thanks for sharing. I have a related question:
We financed our CH home on a 100% Saron mortgage with a 0.6% margin. We have a rental property abroad (DE) which will come up for refinancing soon. The DE bank explained to me that the Saron mortgage is viewed as a risk (obviously due to flexible interest rates, aka “stress annuity”) and will negatively impact the rates they offer for the renewal.
Personally, I have little interest in switching the Saron to a fixed rate mortgage at the moment, but it seems I will need to explore this and alternatively also look for other banks in DE which model stress annuities differently. I would be super grateful for some strategic thoughts by the mortgage experts here. Does it makes sense to switch to a 10 year to get better rates in DE or is this just an issue that certain banks have? Thanks in advance!
Mortgage pricing is bank specific, if they offer you bad conditions check with another one.
Totally agreed with @HoiZame, each bank has different rates and usually the rates which are public are negotiable. You don’t like one rate or how they treat you, go to another. Or better send your dossier to several banks at once and see who you like the most.
