Low interest rates: Save with SARON | key4.ch

Low interest rates: Save with a SARON mortgage

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21.04.2021 | 3 minutes

Even though interest rates have risen since the start of the year, they remain at a low level. Therefore, anyone interested in currently buying a property may well decide that a fixed-rate mortgage is a favorable option right now. Ultimately, your intuition might tell you that you need to secure these low interest rates now through a long-term fixed-rate mortgage.

In this case, however, your intuition is actually deceiving you! Instead of a fixed-rate mortgage, financial experts are now advising cost-optimizing mortgage borrowers to opt for a different type of mortgage: “According to the interest rate expectations of the Swiss financial market, the money market mortgage (Geldmarkthypothek) remains the most cost-effective form of financing,” reports the Interest Rate Outlook for Mortgage Borrowers (“Zinsausblick für Hypothekarnehmer”) published by UBS. Depending on your personal situation, a combination of a SARON mortgage and fixed-rate mortgage may also make sense.

The keyword in this context is SARON. The Swiss Average Rate Over Night, which is an important Swiss reference interest rate published daily. Most banks in Switzerland offer mortgages based on the SARON reference interest rate. These are highly flexible mortgages with an indefinite term. However, the terms and conditions of each offer may vary depending on your provider. The quarterly interest payable tracks the reference interest rate on a 1:1 basis. To determine the interest rate for the respective period, the SIX Swiss Exchange provides the Compounded SARON reference interest rate, which is calculated from the average daily compounded SARON interest rate, thus making SARON a highly transparent product. These money market mortgages, as the experts call them, are in contrast to fixed mortgages whose interest rate is simply “fixed”.

SARON mortgages – benefit from interest savings

If the Swiss National Bank keeps interest rates low for several years, SARON mortgages will also benefit from this attractive, low interest rate environment. This is also true for fixed-rate mortgages, but it must be remembered that any additional security comes at a cost. Interest rates for fixed-rate mortgages are generally higher than interest rates for money market mortgages (SARON).

View into one of the SIX Swiss Exchange buildings
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Money market mortgages – some favorable facts

Money market mortgages, formerly known as LIBOR mortgages, have been in Switzerland since the 1990s. Anyone who took out a money market mortgage was amply rewarded with cost savings. Let’s compare the costs: In most of the periods analyzed, the average interest rates for fixed-rate mortgages were approximately twice as high as those for money market mortgages.

Even in the event of temporary market interest rate fluctuations, most customers with these products have never regretted their decision. This is also confirmed by a recalculation from as far back as 2007, which was conducted by the Swiss National Bank (SNB): In 95% of the interest rates observed, borrowers who took out money market loans were able to make interest savings (compared with the long-term average interest rate for fixed-rate mortgages).

In the case of SARON mortgages, the customer’s interest rate is set at the end of each quarter. You do not have to perform the calculation yourself as the bank will do this for you. SARON represents an objective quantity that can be verified at any time, thus making it a transparent and reliable product.

The greatest possible flexibility

What are the benefits of SARON mortgages when both short and longer loan terms are favorable anyway? The product itself offers other advantages: Unlike the fixed-rate mortgage, this model does not require you to make a commitment spanning several years. Furthermore, if you decide to switch to a fixed-rate mortgage, either due to rising interest rates or a change in personal circumstances, it is possible with the key4 SARON mortgage in just a few working days.

To sum it up, SARON mortgages are the right choice when all signs point towards persistently low or even falling interest rates, while fixed-rate mortgages are suitable if you want to protect against a potential rise in interest rates. It always depends on your own personal situation:

  • What is the expected holding period for the property? Is flexibility important to you?
  • What is your own risk profile and risk tolerance?
  • How much financial leeway do you have in terms of finance affordability?
  • Do you have any personal interest in actively managing your mortgage? And what is your knowledge of money markets and capital markets in general?

SARON mortgages are suitable if you can financially bear certain fluctuations, especially short-term increases in interest rates, and if you follow the money markets and capital markets. Our key4 advisors will be happy to help you find the mortgage model that is right for you.

Outlook

Since the introduction of negative interest rates in 2015, SARON has also been in negative territory. In this case, a zero percent interest rate is the basis for the mortgage, plus an individual margin. The improved outlook for the U.S. economy led to a sharp rise in interest rates in February, but with central banks being cautious, government bond interest rates and mortgage interest rates are unlikely to rise much further here in Switzerland, even if the recovery is felt elsewhere in the global economy. Both the dampened economy and the monetary policy of the central banks point to a continuation of very low interest rates.

How will interest rates evolve?

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