Mortgage terms: short or long?

Mortgage terms: how long should I commit myself for?

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09.12.2020 | 2 minutes

Look before you leap. This is especially true when it comes to financing your home. This is because mortgages usually have a defined term. The spectrum ranges from flexible, short-term models to fixed-rate mortgages with 15-year terms.

Which term is right for me?

Many homeowners opt for fixed-rate mortgages with long terms. This type of mortgage over five or ten years is extremely popular. But what suits the majority is not always the best choice in individual cases.

The term that is best for you depends on individual factors. The first question to answer is what type of person you are. Is it important for you to be able to plan a reliable budget with fixed interest costs? Or do you value flexibility and want to keep interest rates low – with the residual risk that things might turn out differently than you expect?

Living circumstances must also be taken into account. For example, if a couple is likely to be looking for a new property in a few years’ time when their children move out, a long mortgage term could prove to be an undesirable “shackle”.

Finally, your own personal market evaluation also plays a role. Anyone who expects interest rates to fall tends to be well served with a short-term mortgage. They simply need to be able to sleep well if interest rates rise against expectations.

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Advantages of mortgages with long terms

The more security conscious the borrower, the more advisable a fixed-rate mortgage with a long term. The advantage is obvious: it’s possible to set a specific interest rate for several years. This makes future housing costs calculable over the agreed term and protects against the risk of interest rate changes.

Currently, the flat interest rate curve also speaks in favor of a fixed-rate mortgage with a long term. In plain English, this means that long-term interest rates are only slightly higher than short-term rates. The surcharge for additional planning reliability with “tied” interest is therefore low.

Conversely, depending on the terms of the contract and the associated early redemption penalty, it may not be possible to cancel the mortgage and switch to a more favorable financing arrangement if interest rates fall. Even if your living circumstances change, for example as a result of a divorce, and you have to part with your home, the mortgage will remain in force. If the buyer of your property doesn’t take over the mortgage, an early redemption penalty will become due. However, situations like this must be examined individually in order for solutions to be found.

Terms according to the type of mortgage

There are also good reasons for opting for a mortgage with a short term. Choosing a short term allows you to remain flexible. If you are suddenly tempted by a job offer abroad, you can sell your home quite quickly without incurring an early redemption penalty.

In addition, mortgage holders are free to react regularly to changes in interest rates. No one is stopping them from switching to another mortgage or another provider. But to benefit, they must keep up to date with market conditions. This is something that requires a certain amount of interest and expertise.

Given that interest rates in Switzerland have been trending downwards in recent years, there have regularly been opportunities for taking out a follow-up mortgage with attractive terms. Historically, however, such a pronounced low-interest phase is an exception.

Terms according to the type of mortgage

The mortgage market is dynamic. Nevertheless, two types of mortgages have become particularly widespread: fixed-rate mortgages and money-market mortgages.

The most popular are fixed-rate mortgages with a fixed interest rate for the entire term. Traditionally, these run over a period of up to ten years. Longer terms are now also available, however, like the 15-year mortgages from key4.

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Money-market mortgages are also a long-running type of mortgage. SARON mortgages in particular are gaining ground. Their interest rate is variable: it depends on the interest rate on the money market, which changes daily. These mortgages are based on the SARON (Swiss Average Rate Overnight), the benchmark interest rate for the Swiss money market. It is replacing the LIBOR, which will no longer be used after 2021.

Contracts for money-market mortgages also usually have terms of one or more years. However, they are generally less expensive to liquidate than fixed-rate mortgages. There are also SARON mortgages without an “expiration date”. They run indefinitely and can be terminated subject to a certain period of notice. Such SARON mortgages are also available through key4.

The classic variable mortgage represents a phase-out model, despite the advantages of its variable interest rates and short terms. However, SARON mortgages are considered more transparent. A glance at the reference rate is enough – and the cost trend is clear.

Conclusion: terms – it all depends on the mix

Putting all your eggs in one mortgage basket for a single term is risky: you zero in on a single scenario. But experience shows that life is full of surprises. For this reason, it’s often advisable to divide the financing into tranches. Depending on your needs, you can combine several models with different terms – and balance out the advantages and disadvantages.


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