Comparing mortgage options: which is the right mortgage for you?

Mortgage options: security or flexibility?

As a general rule, a fixed-rate mortgage offers security, while a variable or SARON mortgage offers flexibility. Which mortgage option is right for you will depend on your personal circumstances and preferences. The first question is whether you’re looking for a fixed interest rate, which allows for easier budgeting, or whether you’re comfortable with the financial risk that comes with a variable interest rate. Unlike fixed-rate mortgages, with a variable or SARON mortgage you can benefit from any interest rate reductions.

Fixed-rate mortgages: fixed interest rate and fixed term

Fixed-rate mortgages allow for long-term planning of monthly mortgage costs. You can secure a favourable interest rate as much as 12 months before taking out the mortgage. With a fixed-rate mortgage, you can choose between terms of two to ten years. The interest rate will remain the same over this entire period. This protects you against rising market interest rates, but it does mean that you can’t benefit from falling interest rates.

When your fixed-rate mortgage expires: how to minimise interest rates

By the time your fixed-rate mortgage expires, the general interest rate level may be higher than the previous interest rate on your mortgage. This means that you may have to accept a higher interest charge for subsequent financing. To minimise this risk, we recommend financing larger amounts using bespoke combinations of products, such as taking out two fixed-rate mortgages with different terms.

Ending your fixed-rate mortgage early

A fixed-rate mortgage cannot generally be terminated early. In exceptional cases, early termination may be possible on payment of a penalty, known as an early repayment charge. How much this is will depend on a number of factors, including the agreed interest rate and any administrative or risk-related costs.

Fixed-date or forward mortgage: setting the interest rate up to a year in advance

If you expect interest rates to rise in the future, you can secure the current interest rate with a fixed-date or forward mortgage. This is especially suitable if you need or want to pay off your mortgage at a certain point in time. It allows you to benefit from current interest rates. Depending on the bank, a surcharge may apply.

SARON mortgage: variable interest rate, indefinite term

What is a SARON mortgage?

SARON stands for “Swiss average rate overnight”. It replaced LIBOR in late 2021. SARON is a reference interest rate based on effectively completed transactions between banks. In simple terms, this is the interest rate at which banks lend money to each other overnight. The interest rates on these loans are added together and averaged to give the compounded SARON rate. As banks are granting new loans on the financial market at new interest rates, this results in a new average and therefore a new SARON, so the interest rate on a SARON mortgage also varies.

Pros and cons of a SARON mortgage

If you’re looking for an open-ended, flexible financing solution for your home and can accept short-term fluctuations in interest rates, a SARON mortgage is the right solution for you. You benefit from a transparent, market-oriented interest rate throughout the entire term. In a normal interest rate environment, money market interest rates are lower than those applied to longer-term loans, but they can also change relatively quickly. During the term, the bank makes appropriate interest rate adjustments at specific intervals – generally every three months. This is based on the Swiss National Bank’s base rate, which in turn takes economic developments into account. This means that you might benefit from falling interest rates, but you also need to have the financial wherewithal to withstand rising interest rates. You can convert your SARON mortgage into a fixed-rate mortgage relatively easily; depending on the bank, this can sometimes be done within just a few days.

Building loans: flexible financing for new builds, conversions and renovations

A building loan is a special type of loan that’s similar to a mortgage. A building account is set up for you, which can be used to handle the running costs of your construction project, including payments to architects, builders and tradespeople. Your building account starts at CHF 0 and falls further and further into the minus figures as you make such payments, up to a predetermined amount. Building loans have an indefinite term, while the interest rate is variable and depends on the type of use. Upon completion of the construction work, the building loan is converted into a mortgage.  You can choose between a fixed-rate, variable-rate or SARON mortgage.

Alternatively, your construction project can also be financed by a mortgage. You can choose between disbursement of the entire mortgage at the start of construction or staggered disbursements during the construction phase. A mortgage has a lower interest rate than a building loan.

Variable mortgages: flexible financing

Variable-rate mortgages have no fixed term and the interest rate changes depending on the situation on the money and capital markets. They have a notice period of three to six months. This allows you to switch to a different mortgage model quickly if, for instance, interest rates are rising. A variable-rate mortgage is particularly useful as a temporary solution if homeowners are keen to sell their property in the foreseeable future.

However, the high flexibility of a variable-rate mortgage comes at a price: it is a relatively expensive form of financing. In addition, the rules governing interest rate adjustments aren’t as clear as for money-market mortgages, without any certainty that falling interest rates will be passed on immediately.

Comparing mortgage options: the pros and cons at a glance

From “first home” to “green” mortgages: special deals

When looking for the right mortgage, it’s a good idea to look out for special deals. Sometimes banks offer interest subsidies for your first home or for porting an existing mortgage from another bank. Energy-efficient properties and construction projects may also be rewarded with attractive interest rates.

Conclusion: it pays to do your homework

You’re now aware of the main pros and cons of the different mortgage options. There’s no right or wrong decision – the important thing is that your chosen mortgage option suits you and your wishes and requirements. Your deposit size, monthly income and regular expenses are also key. A consultation with a professional can help you tailor the mortgage to your personal circumstances.