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Many experts and media expected a key interest rate hike. On the one hand, a surge in inflation is foreseeable at the end of 2023 and beginning of 2024 because rents and energy prices will rise. Secondly, the interest rate differential with other countries is so large that the Swiss National Bank would have had scope for a key rate hike without risking an undesirable appreciation of the Swiss franc. But first things come differently, and secondly than one might think: On September 21, the SNB surprisingly announced that it was taking an interest rate pause and leaving its key rate at 1.75 percent. Almost all market participants had expected an increase of 25 basis points. After five consecutive rate hikes since June 16, 2022, this is the first time the SNB has refrained from raising its key interest rate. What does this mean for mortgages and interest rate developments until the end of the year?
In the U.S. (inflation rate 3.7 percent), the Federal Reserve Bank left its key interest rate at 5.25 to 5.50 percent on September 20. In the European Union (inflation rate 5.2 percent), the European Central Bank raised its key interest rate to 4.50 percent on September 14.
Although the SNB decision caught most analysts and media on the wrong foot, there are good reasons for an interest rate pause:
Postponed is not canceled. SNB President Thomas Jordan justified the decision by citing falling price pressures in Switzerland, but at the same time warned: "We will monitor inflation closely in the coming months." The SNB now assumes that the inflation rate will be permanently below 2 percent again from 2025 and thus within its target corridor of 0 to 2 percent. The non-increase relieves homeowners, tenants and businesses. With its monetary policy, the SNB is walking a fine line between inflation and recession. On September 20, one day before the SNB's interest rate decision, the The expert group on business cycles revised its forecast for economic growth next year downward from 1.5 to 1.2 percent. This probably (partly) influenced the decision.
If you refinance or finance your home ownership or real estate purchase with a fixed-rate mortgage, you will feel little. As of September 21, 2023, indicative benchmark rates for ten-year fixed-rate mortgages at UBS key4 mortgages, for example, were 2.35 percent* or higher (up from 2.46 percent* or higher after the last key rate increase on June 22, 2023). That's double what it was at the beginning of 2022. If you have yet to renew your mortgage, everything will remain the same for you. 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 also won't feel much because the prime rate is based on the prime rate. Saron mortgages will cost about 1.70 percent after Sept. 21, 2023, plus a 50- to 125-basis-point margin, depending on your credit score. The bottom line is that a Saron mortgage should cost 2.25 to 3 percent. The 75 basis point spread is due to the credit quality margin. Saron mortgages have lost much of their interest rate advantage in recent months, but they are still slightly cheaper than fixed-rate mortgages over the long term.
The Saron reference interest rate changes daily and can fluctuate significantly. That's why Saron mortgages are suitable for homeowners who have no problem 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, property prices rose by 1.2 percent in Q2 2023 and by 2.4 percent year-on-year. Prices for condominiums (+ 1.6 percent) rose by more than twice as much as prices for single-family homes (+ 0.7 percent) in Q2. After the five rate hikes since mid-2022, supply has increased and demand has decreased, yet demand continues to exceed supply. This will support real estate prices for the time being. Slight price declines can certainly be expected from 2024 onwards. Housing is too scarce for a strong correction. UBS's Real Estate Bubble Index classifies the real estate market as overvalued, but there is little danger of the bubble bursting. The index fell from 1.49 to 1.41 in Q2 2023 and is far below the 2.60 in the early 1990s, when the real estate bubble burst and property prices in Switzerland fell by up to 40 percent.
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Most market participants expected a key interest rate hike. As a result, mortgage rates eased minimally after the SNB decision on September 21. The situation has hardly changed for homeowners. Regardless of whether they financed their residential property with a SARON mortgage and/or a fixed-rate mortgage. After the SNB decision, they still have all options open. Although an interest rate hike cannot be ruled out, it is becoming increasingly unlikely - it is quite possible that the interest rate peak in Switzerland has now been reached. We therefore expect SARON mortgages and fixed-term mortgages to move sideways until the end of the year. However, some volatility is to be expected due to recession and inflation fears.
* Indicative interest rates at 12 noon on September 21, 2023. UBS key4 mortgages has determined 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 conditions for sustainability certificate, disbursement date September 22, 2023.
Fixed-rate mortgages have become cheaper, but with a Saron mortgage you still save money in comparison. However, you should have enough financial leeway for interest rate fluctuations and keep yourself informed about the current interest rates and outlook. With a fixed-rate mortgage, you know to the Swiss franc how much you'll 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. 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.
How you finance or refinance your home depends on more factors than the current interest rate. When deciding on a mortgage model and the appropriate terms, your financial situation, future plans and risk capacity as well as an assessment of the mortgage interest rate trend play just as important a role. If you are unsure, you should seek advice and compare offers. This is even more important than usual in uncertain times like these. The most favorable offer at first glance is not always the best offer for you.
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 raises its key interest rate and thus indirectly the interest rate for Saron mortgages, the interest rate advantage melts down to less than ten percent; if it raises interest rates several times and more than expected because it cannot get a grip on inflation, a ten-year fixed-rate mortgage would be the cheaper option. This overview helps with the decision, but 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.