Mortgages 2021: what is the outlook?

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17.12.2020 | 2 minutes

Mortgage interest rates have been low for years. Will that soon be a thing of the past? And how great is the risk of a real estate bubble bursting? The experts agree: 2021 will be a good year overall – with the right choice of strategy.

Three developments to expect in 2021

Trend 1: no interest rate changes in sight

For interest rates in the mortgage market to rise significantly, an interest rate increase by the SNB would have to be foreseeable in the next few years. But the deepest recession in decades makes this scenario seem unlikely for years to come. Forecast: mortgage rates will remain low, at least in the coming year.

Trend 2: relative risk of a real estate bubble

It is true that the risk of a real estate bubble is currently quite high. This is shown by the UBS Real Estate Bubble Index, which measures the risk of a real estate bubble on the Swiss property market. The index entered the bubble risk zone in the third quarter of 2020. However, analysts attribute much of this move toward a bubble to COVID-19. And they assume that the risk will decline again throughout Switzerland with the economic recovery expected in 2021.

Trend 3: a decrease in location-based costs

Positive trends are also evident in location-based costs. This is the total obtained by adding together the running costs of a home, the tax burden on income and assets, and health insurance premiums. The amount fell by around one percent in 2020 – despite rising purchase prices in around three-quarters of all Swiss municipalities.

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Choice of mortgage in 2021: fixed-rate mortgage or money-market mortgage?

Anyone wishing to take out a new mortgage or renew an expiring mortgage in 2021 basically has a choice between a fixed-rate mortgage, a money-market mortgage or a combination of the two. When making a decision, they should not only keep interest rate expectations in mind, but also ask themselves how they are positioned with regard to the following three risks:

Interest rate risk

The strategic question here is: are you more of a security-oriented or a cost-oriented mortgage borrower? If you are looking for security in a mortgage, you will tend to choose a fixed interest rate. Over the past 20 years, however, more security has always meant higher costs. Cost-oriented mortgage borrowers are likely to continue to fare better with money-market mortgages for the foreseeable future. However, they should be sure that they will be able to bear an increase in interest rates even if their income falls. In case of doubt, a fixed-rate mortgage makes perfect sense, and the additional costs are likely to remain low in 2021.

Commitment risk

It can prove expensive to repay a mortgage early if the property has to be sold due to a change in living circumstances. The general rule is that the lower the interest rates on the date of contract termination, the higher the exit costs. And interest rates are currently low. Consequently, when choosing the term of a fixed-rate mortgage, the probability of having to repay the mortgage early plays a key role.

Refinancing risk

Borrowers who hold all their financing with a fixed-rate mortgage that they will have to renew at some point risk facing higher costs due to the interest rate situation. It is possible to hedge against this eventuality by spreading out long-term mortgages over time. For example, by combining a seven-year mortgage with a ten-year mortgage – in terms of cost, the two are almost identical. This allows the borrower to benefit from a significantly lower refinancing risk.

key4 offers the great advantage that you can choose the most attractive provider for each mortgage tranche and combine up to three tranches as you wish. Just give us a few details and you will immediately receive non-binding offers from various Swiss providers. If you are interested in an offer, you can then make an appointment with an advisor. They will assist you with the next steps and work with you to find the most suitable and attractive offer – personally tailored to your needs.

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SARON mortgages in 2021

When it comes to money-market mortgages, the SARON will definitively replace the Libor as the benchmark for interest rate calculation at the end of 2021. SARON stands for “Swiss Average Rate Overnight” and is calculated on the basis of completed transactions in the Swiss money market. It was developed by SIX Group Ltd. in association with the Swiss National Bank. The SARON is publicly visible, transparent and is calculated and published by SIX daily after the close of trading. The key4 SARON mortgage is recommended for mortgage clients who follow events on the money and capital markets and are financially able to bear short-term interest rate increases. This kind of mortgage offers the advantage of not having a fixed contract term. It is also possible to hedge against rising interest rates by switching to a multi-year fixed-rate mortgage at any time. More information on SARON mortgages can be found here.


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