Since our last mortgage interest rate forecast on January 5, 2023, inflation in Switzerland has risen more sharply than the Swiss National Bank would like. At 3.4 percent (February), the inflation rate is significantly lower than in Europe (8.5 percent) and the US (6 percent), but well above the SNB's target range of 0 to 2 percent. This is why the SNB raised its key interest rate by 50 basis points from 1 to 1.50 percent on March 23, 2023. This had been expected by many analysts, although the SNB was in a dilemma: Because it wants to fight inflation, it had to raise interest rates - but if it wanted to stabilize the banking system after the collapse of three medium-sized banks in the U.S. and the merger of the two major Swiss banks, it would have had to lower rates. The SNB has opted to fight inflation with its fourth interest rate hike since June 16, 2022, and does not rule out further increases. With its interest rate hikes, the SNB wants to fight inflation without choking off the economy.
With its key interest rate hikes, the SNB is walking a fine line between inflation and recession. The expert group on business cycles expects an inflation rate of 2.2 percent this year, slightly above the SNB's target, and below-average economic growth of 1 percent in 2023 and 1.6 percent in 2024. Everyone is feeling the impact of the interest rate hike: real estate buyers are paying higher mortgage rates, as are homeowners who need to extend a fixed-rate mortgage or have financed their home with a SARON mortgage, tenants are paying higher rents, and companies are paying higher borrowing rates. At the same time, our cost of living is rising. That's why many companies have increased wages to compensate for the loss of purchasing power.
If you financed your house or apartment with a fixed-rate mortgage and are due for renewal, you need to prepare for higher housing costs (mortgage interest, ancillary costs and maintenance costs). On March 23, 2023, indicative interest rates for ten-year fixed-rate mortgages at UBS key4 mortgages, for example, were 2.37 percent* or higher - double what they were at the beginning of 2022. If your mortgage is not yet due, everything will remain the same for you. Nevertheless, it is advisable to start thinking about possible refinancing options sooner rather than later.
If you financed your home or apartment with a Saron mortgage, you should also expect a significant increase in your housing costs. The prime rate is based on the prime rate and was 1.41 percent on March 23, 2023. On top of that, there is a margin of 0.6 to 1.3 percent, which depends on your credit score and is set by your bank. The bottom line is that a Saron mortgage costs at least 2.01 percent. Although Saron mortgages have lost much of their interest rate advantage, they are probably cheaper in the long run than long-term fixed-rate mortgages.
The "Saron reference interest rate" changes daily and can fluctuate greatly. That's why Saron mortgages are suitable for homeowners who can live with interest rate fluctuations and have a financial cushion. If you prefer to calculate on a budget, you can sleep more soundly with a fixed-rate mortgage.
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Measured by the Swiss residential property price index (IMPI), which measures market prices for residential property on a quarterly basis, property prices rose by 6.4 percent in 2022. Single-family homes (up 7.3 percent) more strongly, condominiums (up 5.6 percent) less so. In the fourth quarter, home prices rose 2 percent and condo prices rose 0.5 percent. Prices rose most strongly in rural communities and fell slightly in conurbations such as Basel, Bern, Geneva, Lausanne and Zurich. Price growth slowed after the key interest rate hikes. Due to higher interest rates, demand is likely to fall because not everyone can afford or wants to own their own home, and supply is likely to rise because more and more homeowners want or need to sell. Most real estate agents expect stable to slightly rising real estate prices. A price correction of 10 percent or more is only to be expected if mortgage interest rates rise more sharply.
In the fourth quarter of 2022, the UBS Swiss Real Estate Bubble Index climbed from 1.53 to 1.54 points. This means that the real estate market is considered overvalued. Nevertheless, the real estate experts at UBS are not warning of a real estate bubble. Firstly, because the index was much higher during the last real estate crisis in Switzerland in the early 1990s. For another, because economic development is solid, mortgage debt has slowed and construction investment is falling.
Do you want to sell your property? With our Property Valuation you can estimate the market value of your house or apartment and contact certified realtors from your region.
Despite fears of a financial crisis, most analysts expected a key interest rate hike of 50 basis points, but only a few expected 25 basis points. That is why mortgage rates hardly reacted to the SNB decision of March 23. The increase was more or less included in the interest rates. Interest rates for fixed-rate mortgages are likely to move sideways until the end of the year, and interest rates for Saron mortgages are likely to rise by 0.50 percentage points if the financial crisis does not worsen.
* Indicative interest rates on March 23, 2023. UBS key4 mortgages has calculated the interest rates on the basis of these financing parameters: Canton of Zurich, loan amount 500,000 Swiss francs, affordability 24 percent, loan-to-value ratio 50 percent, disbursement date April 24, 2023.
Since the turnaround in interest rates in mid-2022, many homeowners have been financing their homes on a shorter-term basis. One-third of new mortgages taken out in the second half of the year were Saron mortgages. They are significantly more popular in German-speaking Switzerland (43 percent) than in French-speaking Switzerland (21 percent). By contrast, the share of ten-year fixed-rate mortgages fell from half to a quarter.
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When choosing a mortgage model, your financial situation and risk tolerance play just as big a role as the interest rate and interest rate forecasts. With a Saron mortgage, you're likely to save money, but it's important to regularly check current interest rates and have enough financial flexibility for interest rate fluctuations. A fixed-rate mortgage allows for reliable budgeting. For most homeowners, combining different mortgage models and terms makes sense. In this way, they spread the interest rate risk and at the same time reduce the risk of having to extend the total amount at an unfavorable time.
Financing or refinancing depends on several factors, not just the current interest rate. For example, your financial situation, your future plans, your willingness to take risks and your assessment of the future mortgage interest rate development. If you are unsure, it is advisable to compare different offers and seek advice. In uncertain times like these, this is even more important. The most favorable offer at first glance is not necessarily the best offer for your individual needs. Therefore, compare the offers thoroughly.
