Navigating the Swiss Mortgage Market: Festhypotheken vs. Saron-Hypotheken
In the Swiss mortgage market, there is currently an exceptional situation where the traditionally secure fixed-rate mortgages are, on average, cheaper than the volatile Saron mortgages.
Festhypotheken: Securing Against Rising Interest Rates
- According to Lukas Vogt, the head of mortgage broker Moneypark, fixed-rate mortgages with terms up to ten or even fifteen years are currently cheaper than Saron mortgages. The most attractive offers for a five-year fixed-rate mortgage are currently at 1.69%, and for a ten-year fixed-rate mortgage at 1.87%. On the other hand, Saron mortgages start at 2.04%.
- With a fixed-rate mortgage, the interest rate and term are fixed at the contract signing. The term ranges from one to ten years but can be longer. During this defined period, mortgage borrowers know exactly what they need to pay for financing the property. Such mortgages also protect against rising interest rates.
- This is not the case with a Saron mortgage. In this financing method, also known as a money market mortgage, the interest rate fluctuates based on the Saron reference rate. If interest rates drop, borrowers pay less – if they rise, they pay more.
Interest Rates for Saron Mortgages: From Cheaper to Costlier
- Florian Schubiger, co-founder of the comparison platform Hypotheke.ch, states that providers currently demand an average interest rate of 2.25% for a ten-year fixed-rate mortgage. When this average rate surged after the end of the COVID-19 period, reaching 3.2% in October 2022, there was a significant shift towards Saron mortgages, allowing buyers to finance properties at less than 2% interest.
- However, with the Swiss National Bank’s interest rate hikes, this advantage gradually diminished, leading to Saron mortgages becoming even more expensive than fixed-rate mortgages.
- Consequently, the demand for money market mortgages also declined. Comparis, an online comparison service, reported that only 3% of customers opted for a Saron mortgage at Hypoplus in the first quarter of this year, compared to around a quarter in the same period last year.
What Mortgage Borrowers Should Consider
After the SNB’s unexpected rate cut in March, Saron mortgages have become slightly cheaper, but their interest rates still lag behind fixed-rate mortgages. Here are some considerations for mortgage borrowers in the current environment and beyond:
- Current Favor for Fixed-Rate Mortgages: For borrowers valuing planning security, the current environment favors fixed-rate mortgages. According to Beat Seger from KPMG Switzerland, "With a Saron mortgage, there can be short-term interest rate changes, which can be costly in case of a rate hike."
- Potential Resurgence of Saron Mortgages: If the SNB reduces rates by 0.25 percentage points, Saron mortgages are likely to become cheaper than ten-year fixed-rate mortgages again, says Schubiger. Another rate cut in June is partially factored into fixed-rate mortgage rates but could lead to a further reduction in Saron mortgage rates, making them slightly cheaper.
- Historical Advantage of Saron Mortgages: Over the past decade, opting for Saron or money market mortgages instead of fixed-rate mortgages has been financially beneficial due to overall declining interest rates. However, market conditions are unpredictable, and a substantial rise in inflation could lead to a significant increase in rates.
- Suitability of Saron Mortgages: Saron mortgages are not recommended for buyers with limited funds or those uncomfortable with potential interest rate fluctuations. However, they are suitable for middle-class individuals with a financial cushion.
- Caution with Tranchensplits: Borrowers should be cautious with Tranchensplits, where a portion of the mortgage is issued as Saron and another portion as fixed-rate. This can lead to dependency on the financing provider and potentially higher rates upon renewal.
- Beware of Special Clauses: Some financial institutions only offer Saron mortgages with a specific term, binding borrowers to stay with the provider for a set period. These restrictions limit negotiation flexibility for fixed-rate mortgages.
In conclusion, navigating the Swiss mortgage market requires a thorough understanding of the differences between fixed-rate and Saron mortgages, considering individual financial circumstances and market conditions to make an informed decision.