Fixed-rate mortgages
How does a fixed-rate mortgage work?
Fixed-rate mortgages (Festhypothek, hypothèque à taux fixe) is by far the most common mortgage model among Swiss property owners. It provides stability and financial predictability. The interest rate is established at the signing of the contract, in alignment with current market rates and the bank's risk assessment. With a fixed-rate mortgage, your monthly expenses are entirely predictable, as the interest rate remains constant throughout the entire term. Terms commonly extend up to 10 years or even longer.
Advantages of fixed-rate mortgages
- Financing costs are predictable over the entire term.
- You are protected from rising interest rates.
- The duration or term of the mortgage can be freely negotiated.
Disadvantages of fixed-rate mortgages
- You don’t profit from falling interest rates.
- You are less flexible than with other mortgage products.
SARON mortgages
What is a SARON mortgage?
In a SARON mortgage, the interest rate isn't fixed at the contract's inception; instead, it tracks current interest rates (so-called tracker mortgage). The individual interest rate is the sum of the SARON base interest rate, which is always at least 0%, and your individual margin. The base interest rate is calculated for each settlement period from the accrued daily SARON rates published by the Swiss National Bank. The settlement period is determined in the agreement, but 3 months are the most common.
Advantages of SARON mortgages
- You profit from falling interest rates.
- During periods of low interest rates, SARON mortgages are generally a bit cheaper than fixed-rate mortgages.
Disadvantages of SARON mortgages
- You bear the interest rate risk yourself. If rates rise, your costs rise as well.
- Your financing costs are unpredictable.
Variable mortgage
What’s a variable mortgage?
In Switzerland, the term ‘variable mortgage’ (variable Hypothek, hypothèque à taux variable) refers to a very specific type of product. With a variable mortgage, the interest rate can vary, which makes it quite similar to a SARON mortgage; however, the rate is not directly based on market rates, but is instead set by the bank according to their own criteria. The significant advantage of variable mortgages lies in their flexible contract terms. There is neither a fixed term nor a minimum mortgage amount, and switching or redeeming the mortgage is usually straightforward.
Variable mortgages are particularly suitable as interim financing. Say you already know that you are going to sell your property in the near future; in this case, a variable mortgage can be a good choice, since it can be easily redeemed. However, this flexibility comes at the cost of much higher rates compared to other mortgage models.
Advantages of a variable mortgage
- There is no fixed term.
- A variable mortgage can be redeemed at any time, subject to the notice period.
- There is no minimum amount.
Disadvantages of a variable mortgage
- The interest rate is not transparent.
- Interest rates are high compared to other mortgage products.
- Your financing costs are unpredictable.
Combining multiple mortgages
Combining different mortgage products allows you to leverage the advantages of several financing options. This is known as splitting – the mortgage loan is split into several products, which can be different models, or a combination of multiple fixed-rate loans with different terms.
Option 1: Mixing mortgage models
By combining different mortgage models, you get some of the benefits of each while reducing your risk. For example, combining a SARON and a fixed-rate mortgage creates a compromise between interest rate fluctuations on the one hand and complete financial predictability on the other. If interest rates rise, the fixed-rate mortgage part of the loan provides partial protection. If rates fall, the SARON mortgage allows you to benefit from lower costs.
Option 2: Staggering different terms
You may also choose to split your loan into multiple fixed-rate mortgages of different terms. By spreading the renewal across multiple points in time, interest rate risk is minimised. If a part of the loan expires during a period of high interest rates, you don’t have to refinance the entire mortgage at unfavourable conditions. To ensure effective risk mitigation, there should be a sufficient time gap between terms.
However, staggering your renewal also has a significant drawback: it ties you even more closely to a specific financial institution. Changing to a different bank or insurance company becomes increasingly complicated as the mortgage is divided into more and more parts, as each must be individually redeemed.
Which mortgage is right for me?
Deciding on a mortgage product is crucial and requires a thorough analysis of your individual needs, financial situation, and risk tolerance. Fixed-rate mortgages provide stability and financial predictability, while SARON mortgages can be more cost-effective when interest rates are low. A variable mortgage is particularly suitable as a flexible interim solution. Splitting the loan allows for an even better adaptation to your personal needs but brings additional challenges.
To choose the right model, comprehensive consultation is essential. Engaging with a financial professional can help understand the specific pros and cons of each model and help you understand the finer points of the Swiss mortgage system.
Our advisors are seasoned financial experts with years of experience. We provide independent advice on all aspects of your real estate financing and beyond. With connections to over 80 partners, we can provide you with the best mortgage offer on the market as required. Contact your Strike advisor for your non-binding first appointment.
