Mortgage interest rates: how borrowers can save thousands of Swiss francs

Author: Bernhard Bircher-Suits, FundCom AG

Borrowers in Switzerland can count themselves lucky – interest for fixed-rate mortgages fell again at the end of 2023, after rising sharply in 2022 following the outbreak of the war in Ukraine. The reason for this fall is the sharp decline in inflation in the US, Europe and Switzerland in 2023. This prompted the US Federal Reserve and the European Central Bank to leave their base rates unchanged at the end of 2023. The Swiss National Bank also chose not to raise interest rates.

Inflation and base rates expected to fall further in 2024

The further progression of mortgage interest rates depends mainly on the progression of inflation. Many market observers believe inflation will fall further in 2024. This would mean central banks are under less pressure to raise their base rates further as a means of combating inflation. If inflation continues to fall and central banks adjust their base rates downwards, mortgage lending should also become cheaper again.

Mortgage interest rate rollercoaster: from 1 to 2.8 to 2%

According to the interest rate index compiled by the Swiss comparison site Hypotheke.ch, a home loan cost an average of around 1% interest per year at the end of 2021. This meant that for a mortgage amounting to CHF one million, borrowers ‘only’ had to pay CHF 10,000 a year.

In late October 2022, average interest rates climbed to a short-term high of 2.8%. This rate corresponds to interest costs of CHF 28,000 – a staggering CHF 18,000 higher than the previous year. By the end of January 2024, the average interest rate was back at around 2%, or ‘only’ CHF 20,000 in borrowing costs. In short: if you want to take out a new fixed-rate mortgage or renew an expiring loan in 2024, you will benefit from lower interest rates on fixed-rate mortgages than you would have last year. 

Interest rates for fixed-rate mortgages vary according to solvency

But what exactly can you expect to pay for the kind of fixed-rate, five-year mortgage that is popular in Switzerland? According to the financial advice service VZ VermögensZentrum, interest rates for a five-year fixed-rate mortgage in December 2023 ranged from 1.8 to 2.4%. There are two reasons for this. First, mortgage interest rates are always based on your personal circumstances. Borrowers with a high household income and plenty of their own capital usually pay less in interest than low wage-earners with little capital.

Second, all mortgage institutions are completely free to set the interest rates they offer. This means that short-term mortgages might be very cheap with some providers while long-term mortgages are much cheaper elsewhere. So if you want to save on interest, you really need to compare mortgages.

Unless the SNB cuts base rates, money market home loans will remain expensive

But are long-term fixed-rate mortgages even the best solution at the moment? The fact is that money market, or ‘SARON’ mortgages are significantly more expensive than fixed-rate mortgages in early 2024, with rates ranging from 2.5 to 2.9%.

SARON stands for ‘Swiss Average Rate Overnight’ and it is the most important Swiss money market rate. Flexible SARON non-fixed-rate mortgages come with an interest rate risk throughout the term of the loan. This makes them primarily suited to well-informed borrowers with a financial buffer who can cope with rapidly rising interest rates. If you want to sleep peacefully (and you have no savings), you are better off looking at fixed-rate mortgages, which are currently cheaper.

It’s worth bearing in mind that the interest rate on SARON mortgages is directly linked to the base rate of the Swiss National Bank (SNB). If the SNB reduces the current base rate of 1.75% (as of 23 June 2023), SARON mortgages will quickly become cheaper than fixed-rate mortgages. However, market observers do not expect a return to an ultra-low mortgage interest rate of 1%. 

SARON or fixed-rate mortgage?

So: what should borrowers do? Most financial experts believe that central banks could start lowering their base rates again in 2024. If you believe that interest rates will fall, have a financial buffer and you can wait a little before you take out a loan, you can get at least part of the loan in the form of a SARON mortgage. This means you will benefit from falling interest rates if the Swiss National Bank further reduces the base rate.

If you are low on financial reserves and cannot afford higher interest rates, a fixed-rate mortgage will help you sleep easier. So depending on your financial situation, you need to choose a credit strategy that is matched to your needs over the coming years. The following tips will help you decide on the ‘right’ mortgage. You can read more about financing and insurance in our guide. 

Tips for a mortgage strategy

Negotiate mortgage interest rates and review tranches

Mortgage interest rates are primarily a matter of negotiation with banks. If you take a structured approach, optimise your personal rating in advance and negotiate well, you can knock off 0.3 to 0.6 percentage points. You can also split a mortgage into multiple tranches with different terms. This hedges the risk of rising interest rates over a long period of time.

Fixed-rate mortgage: check the pros and cons

With a fixed-rate mortgage, you can secure a fixed interest rate for several years. Fixed-rate mortgages offer budgeting security and protect you from rising interest rates. On the other hand, you won’t benefit from falling interest rates. Check insurance and pension fund offers at your local bank or arrange, for example, a free video consultation with Homegate partner UBS.

Define your financing strategy

Your budget will have a significant influence on your financing strategy. The online Homegate affordability calculator helps you check if a property is affordable for you. You can use it to work out your financial sustainability and leverage. You will need at least 20% of your own funds, and at least 10% of that has to come from sources other than your occupational pension. Annual housing costs shouldn’t exceed 33% of your gross income.

Keep an eye on mortgage interest rates

You can usually track mortgage interest rate developments free of charge on the websites of banks and internet comparison sites as well as in the media. Some financial institutions also offer interest rate alerts. This means you will receive news about changes in mortgage interest rates that are relevant to you, as soon as they happen.

SARON mortgage: check the pros and cons

SARON money market mortgages are typically taken out for a framework term of one to five years. It’s worth bearing in mind that with most providers, you can convert the SARON mortgage into a fixed-rate mortgage during the term. Some providers will also allow full repayment on the next interest date (others exclude this for the entire term). In some cases you can find SARON mortgages without a fixed overall term, which is particularly useful if you want to remain flexible with repayments or switching lenders.

Check forward mortgages

With a forward mortgage you take out a fixed mortgage in advance even though you won’t need it for several months. This helps you secure the current interest rate. You pay the lender for this security with a ‘forward surcharge’. So you can think of forward mortgages as insurance against rising mortgage interest rates. Because long-term interest rates are currently cheaper than short-term interest rates, forward surcharges are very low at the moment. Some providers offer early mortgages up to 6 or even 12 months in advance at no extra charge.