Spoilt for choice: variable or fixed mortgage? A comprehensive analysis of the pros and cons with valuable tips and tricks to help you make your decision.
Buying a property is one of the biggest investments most people make in their lives. When deciding which type of mortgage to choose, there are many factors to consider. One of the most important decisions you have to make is whether to opt for a Saron mortgage or a fixed-rate mortgage. Our article will help you make the right decision between the two types of mortgage.
Die Saron-Hypothek ist eine Hypothek mit einem variablen Zinssatz, der täglich ändern kann. Als Basis für den Saron (Swiss Average Overnight Rate) dient der Leitzins der Schweizerischen Nationalbank (SNB).
Saron-Hypotheken laufen üblicherweise 2 bis 5 Jahre. Über diese Laufzeit hinweg bleibt der Hypothekarbetrag unverändert, ausser es wurden direkte Amortisationen oder anderweitige (Teil-)Rückzahlungen vertraglich festgelegt.
Saron Hypotheken aller Laufzeiten werden unter dem Begriff Geldmarkthypotheken geführt, da es sich eher um kurzfristige Finanzierungen handelt die auf Basis des Geldmarktes verhandelt werden.
The term of the Saron mortgage is regulated by a framework agreement covering the agreed duration. Even if this framework agreement has a fixed term, there is usually still a notice period for Saron mortgages. This is usually six months. In order to comply with this notice period, you must submit an official notice of termination to your mortgage lender six months before the framework agreement expires. This ensures that you can compare the various offers after the Saron mortgage expires and, depending on interest rate developments and offers, even change providers if necessary.
Libor was abolished at the end of 2021. Until then, Libor had been the basis for money market mortgages (Libor stood for ‘London Interbank Offered Rate’). The Saron mortgage was therefore known as the Libor mortgage for many years. Whether Libor or Saron, both types of mortgage have interest rates that change daily. Libor and Saron also have very similar interest rates. If you want to find out about the historical development of the Saron interest rate, you can therefore use Libor as a good reference value.
Looking at this chart alone, one might get the impression that interest rates are rising steadily. That is why it is important to look at the long-term picture. The chart of the Libor (predecessor of the Saron) since 2002 helps here:
A fixed-rate mortgage is a mortgage with a fixed interest rate, a fixed term and a fixed, i.e. constant, mortgage amount. Contractually agreed direct amortisations and other (partial) repayments are excluded.
The interest rate remains unchanged throughout the term of the mortgage, regardless of fluctuations in the general interest rate level. Normally, the longer the contractually agreed term, the higher the interest rate.
Fixed-rate mortgages are available with terms ranging from 2 to 10 years. Upon request, some mortgage institutions offer longer terms, such as 15, 20 or even 25 years. The most popular mortgage in Switzerland at present is the 10-year fixed-rate mortgage.
When deciding between a Saron mortgage and a fixed-rate mortgage, there are a few tips and tricks that borrowers should consider.
First, borrowers should consider their personal financial circumstances and needs. If they have a limited income or need or want to plan their monthly payments carefully, a fixed-rate mortgage is the better choice. However, if they prefer flexibility and the opportunity to benefit from lower and/or falling interest rates, a Saron mortgage may be the better choice. If the general interest rate level is at historic lows, it makes sense to lock in these favourable interest rates for the long term.
In the case of fixed-rate mortgages, there are some providers who offer to switch to an even longer-term contract free of charge during the term. Even in the event of early termination, there are various mortgage institutions that reduce the early repayment penalty to a lump sum (e.g. only a few thousand pounds).
Some providers allow you to switch to a fixed-rate mortgage during the term of the framework agreement for Saron mortgages. However, this fixed-rate mortgage must then run for at least as long as the remaining term of the Saron mortgage.
If you are planning to make large partial repayments on your mortgage, you can either take out a very short-term fixed-rate mortgage or a Saron mortgage for this amount, while choosing a long-term fixed-rate mortgage for the remaining mortgage amount.
Borrowers should definitely compare the interest rates and terms offered by different lenders, or have them compared, in order to find the best deal. Some lenders may offer lower interest rates or better terms for a Saron mortgage, while others may offer better terms for a fixed-rate mortgage.
Finally, borrowers should always consider the long-term implications of their decision. A Saron mortgage may be more attractive in the initial phase, but if interest rates rise, monthly payments can quickly increase and place a strain on the borrower. A fixed-rate mortgage, on the other hand, offers long-term planning security, but usually at a higher interest rate. It is therefore important to weigh up the advantages and disadvantages of both options and make a decision that best suits your individual financial needs.
The team of experts at MY HYPOTHECA looks forward to an initial consultation.
The most common customer questions about Saron or fixed-rate mortgages and our answers to them.
Those on a tight budget would be better off switching to a fixed-rate mortgage, as the agreed interest rates are fixed. Over a period of around six months, the Saron mortgage will become more expensive than it is today.
The Saron mortgage rate is likely to continue rising throughout 2023, after which the SNB will probably not raise interest rates any further for the time being. However, there is no guarantee of this.
At the beginning of May 2023, the Saron stood at 1.41%, which is slightly lower than the SNB key interest rate of 1.50%. To find out the effective customer interest rate, the individual margin of the mortgage institution must be added to this 1.41%. Depending on the provider and negotiating skills, the margin ranges between 0.5% and 1.25% p.a.
The SNB’s goal is medium-term price stability. If the current interest rate hikes (implemented and announced/expected) are not sufficient to counteract inflationary pressure in Switzerland, further interest rate hikes may be necessary, bringing the Saron well above 2% and possibly even towards 3%.
If your budget can cope with one or two further interest rate hikes by the SNB, a Saron mortgage may still be a sensible and affordable financing option. If inflationary pressure in Switzerland remains high, even higher SNB key interest rates are to be expected. A Saron mortgage is less advisable in such an environment.
Most mortgage providers offer the option of switching to a fixed-rate mortgage from the same provider during the term of the Saron framework agreement. The term of the new fixed-rate mortgage must be at least equal to the remaining term of the Saron mortgage.
In the medium term, interest rates are expected to stabilise. As soon as inflationary pressure eases, mortgage interest rates in Switzerland will stop rising or even fall slightly.
After the SNB raised its key interest rate in several steps starting in 2022, it lowered it again in spring 2024. The Saron rose and fell in line with the SNB key interest rate.
The Saron currently stands at 1.45%. The cheapest Saron mortgage is therefore around 2% p.a.
Focusing purely on the current interest rate, medium to long-term fixed-rate mortgages are more attractive than Saron mortgages. However, it should be noted that further interest rate cuts could be expected with Saron mortgages. The market expects one or two further interest rate cuts of 0.25% each by the end of 2024 and H1 2025. This would mean that the interest rate for a Saron mortgage in mid-2025 would be around 1%, making it cheaper than most fixed-rate mortgages.