The question before its monetary policy assessment on June 22, 2023, was not whether the Swiss National Bank (SNB) would raise its key interest rate or not. The only question was by how much. Exactly one year to the day after its first key interest rate hike in 15 years, the SNB raised its key rate by 25 basis points from 1.50 to 1.75 percent. The last time short-term Swiss franc interest rates were this high was before the global financial crisis of 2008/2009. A year ago, the key interest rate, which has a significant impact on mortgage rates in Switzerland, was still negative at minus 0.25 percent. Most experts had expected plus 0.25 percent on June 22, 2023, with a few expecting plus 0.50 percent. With the interest rate hike, the SNB wants to fight inflation. However, it is stuck in a vicious circle: if it raises interest rates, financing costs for real estate will rise and thus rents, which will drive inflation. Rents have a strong influence on inflation because housing costs - rent and ancillary costs - account for around a quarter of Swiss household spending.
In the USA (inflation rate 4 percent), the Federal Reserve Bank refrained from raising interest rates in June after twelve key rate hikes in succession. In the European Union (7.1 percent), the European Central Bank raised its key interest rate by 0.25 percentage points to 4 percent.
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The interest rate increase will be felt by everyone. Real estate buyers and homeowners will feel less of it, because the increase in the prime rate was expected and included in the mortgage rates. Tenants will feel more of it, because the reference interest rate increase will mean that many rents will rise after the expiry of the notice period from October 2023. This is likely to affect around one million households. With its fifth key interest rate hike, the SNB is clearly communicating that it still considers inflation to be too high. At 2.2 percent, the inflation rate in May was well below its high of 3.5 percent in the summer of 2022, but still above the target corridor of 0 to 2 percent. After all, the SNB has lowered its forecast for 2023 from 2.6 to 2.2 percent. For 2024 and 2025, it expects 2.1 percent.
Swiss investment foundations, banks, insurance companies and other lenders have around 1,200 billion Swiss francs in mortgages outstanding. That is almost 138,000 Swiss francs per inhabitant, more than in any other country.
If you refinance or finance your home ownership or real estate purchase with a fixed-rate mortgage, you will feel little or nothing of this key interest rate increase. The market expected it, which is why the increase was included in the prices, i.e. interest rates. On June 22, 2023, the indicative benchmark prices for ten-year fixed mortgages at UBS key4 mortgages, for example, were 2.46 percent* or higher. That's only marginally more expensive than after the March 23, 2023 rate hike of 2.37 percent* or higher, but double what it was at the beginning of 2022. If you have yet to renew your mortgage, everything will remain the same for you for now. Nevertheless, you should think about possible refinancing alternatives too early rather than too late.
If you refinance or finance your home or real estate purchase with a Saron mortgage, you will feel this prime rate increase because the prime rate is based on the SNB prime rate. Saron mortgages would have to cost plus/minus 25 basis points more after the March 23, 2023 prime rate increase. Figure on about 1.75 percent. Add to that a margin of 0.6 to 1.3 percent, which depends on your credit score and is determined individually by your bank. The bottom line is that a Saron mortgage should cost 2.35 to 3.05 percent after the latest prime rate increase. The 70 basis point range is due to the credit quality margin. Although Saron mortgages have lost much of their interest rate advantage, they are less expensive than fixed-rate mortgages in the long run.
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.
Measured by the Swiss residential property price index (IMPI) for the first quarter of 2023, property prices rose by 3.9 percent year on year but fell by 1.2 percent in the first quarter of 2023. Prices for single-family homes (down 1.3 percent) fell slightly more than for condominiums (down 1.1 percent). The price decline for single-family homes was most pronounced in rural areas (minus 4.5 percent). After the interest rate hike in the spring, demand fell because not everyone can afford or wants to own a home, and supply rose because more and more homeowners want or need to sell. This trend is likely to continue after the recent interest rate hike. That is why many realtors expect stable to minimally rising real estate prices in the coming months, because demand still exceeds supply despite everything. Most realtors do not expect a major price correction (ten percent or more) as long as mortgage rates do not rise more sharply. In the first quarter of 2023, the UBS Swiss Real Estate Bubble Index fell from 1.54 to 1.49 index points. Although the Swiss real estate market is thus considered overvalued, there is no threat of a real estate bubble. The explanation of the UBS real estate experts: Before the last real estate crisis in Switzerland at the beginning of the 1990s, the index was much higher. Moreover, the economy is solid, mortgage debt is slowing and construction investment is falling.
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The analysts expected a key interest rate increase of 0.25 or 0.50 percentage points. That is why interest rates for fixed-rate mortgages hardly reacted to the SNB's decision and interest rates for Saron mortgages moved in step with the key interest rate hike. The 25 basis points were already priced into rates. Interest rates on fixed-rate mortgages are expected to rise minimally through the end of 2023, and interest rates on Saron mortgages are expected to rise slightly with greater volatility. Unless the Swiss National Bank surprises with more and/or larger increases in lending rates. Most experts expect only a key interest rate increase of 0.25 percentage points in the current year.
* Indicative interest rates as of 10 a.m. on June 22, 2023. UBS key4 mortgages calculated the interest rates on the basis of these parameters: Canton of Zurich, loan amount 500,000 Swiss francs, affordability 24 percent, loan-to-value 50 percent, special condition for sustainability loan, disbursement date June 23, 2023.
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With a Saron mortgage you still save money compared to a fixed-rate mortgage, but you should have enough financial leeway for interest rate fluctuations and keep yourself informed about current interest rates and prospects. With a fixed-rate mortgage, you know exactly how much you will have to pay, but you pay more interest. That's the price you pay for budget certainty. It makes sense not to put everything on one mortgage and divide your financing among different mortgage models and terms with different providers. This way you spread the interest rate risk and at the same time minimize the risk of having to extend the entire amount during a high-interest period.
According to long-term studies, money market mortgages such as the Saron mortgage have historically been less expensive than fixed-rate mortgages. Following the fifth rate hike since June 2022, Saron mortgages now cost nearly as much as fixed-rate mortgages because of the flat yield curve across all maturities. Still, UBS believes money market financing is cheaper with a Saron mortgage over ten years. They estimate the interest rate advantage to be just under a quarter of the cumulative interest payments for a ten-year fixed-rate mortgage. If the SNB were to raise its key interest rate and thus indirectly the interest rate for Saron mortgages, the interest rate advantage would melt away to less than ten percent. If the SNB were to raise interest rates several times and more than expected because it cannot get inflation under control, a ten-year fixed-rate mortgage would be the more favorable option. This overview will help you make a decision, but it is no substitute for personal advice from experts:
With a forward or term mortgage, you can hedge against rising interest rates. You take out a fixed-rate mortgage now that you won't need until later. This way, you secure the current interest rate and pay a forward surcharge for the hedge.
