The Swiss National Bank (SNB) has lowered its key interest rate by a quarter of a percentage point from 1.25% to 1.00% at its third monetary policy assessment this year. This means that the key interest rate, which is decisive for mortgage rates in Switzerland, has fallen from 1.75 to 1.00 percent in three steps over the course of this year, which had been expected by all market participants. In the run-up to the decision, they were simply speculating on whether the SNB would lower the key interest rate by 0.25 percent or even 0.50 percent. Most guessed a quarter of a percentage point and were correct.
In August, inflation in the USA fell from 2.9% to 2.5% and in the eurozone from 2.6% to 2.2%. The European Central Bank lowered the deposit rate for the first time in June and a second time in September to the current 3.75%, while the US Federal Reserve lowered the federal funds rate in September for the first time in five years to its current level of 4.75% to 5%.
Inflation has decreased more than expected since the last monetary policy assessment. At that time, the SNB had predicted 1.5% for the third quarter. There are many indications that this forecast will be undercut in the next few months. Due to the low inflation pressure, the SNB had sufficient leeway to lower the key interest rate without jeopardizing the stability of prices. This was confirmed by retiring SNB Chairman Thomas Jordan at the media conference: “ Inflation pressure in Switzerland has once again fallen significantly compared to the previous quarter. This decline reflects, among other things, the appreciation of the Swiss franc over the last three months. By easing our monetary policy, we are taking account the lower inflationary pressure.”
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As the cut had been expected and many market participants expect the fourth rate cut this year on December 12, 2024, money market and capital market rates barely reacted. This decision had been priced into interest rates for some time now. Following the monetary policy assessment on June 20, the hypotheke.ch interest rate index has fallen by 0.4 percentage points from 1.99% to 1.59%. In Thomas Jordan's monetary policy assessment, he emphasized that the SNB will continue to monitor inflation developments closely and adjust its monetary policy as necessary to ensure that inflation remains within the price stability range in the medium term. The target range for the inflation rate is between 0 and 2 percent.
If you financed your home with a SARON mortgage, you benefit directly because SARON is linked to the key interest rate. A SARON mortgage costs 1.75 percent or more (0.95 percent plus 80 to 130 basis points credit rating margin). If you have financed your home with a fixed-rate mortgage or are looking to finance your purchase with a fixed-rate mortgage, little will change. The market has priced in the lower interest rates, which is why interest rates for fixed-rate mortgages have hardly changed since the SNB's decision. Mortgage interest rates have fallen significantly since the first monetary policy assessment in 2024. On September 26, 2024, for example, a ten-year fixed-rate mortgage with UBS key4 mortgages cost at least 1.56%* or 34 basis points less than on March 21, 2024.
The SARON reference interest rate is directly linked to the key interest rate and can fluctuate. SARON mortgages are therefore suitable for homeowners who can live with interest rate fluctuations and have financial flexibility. Those who prefer to budget every franc, will sleep more soundly with a fixed-rate mortgage.
The easing inflation pressure and the prospect of further cuts in interest rates (see “How are mortgage interest rates developing?”) are taking the pressure off real estate buyers and owners who will have to extend or redeem their mortgage in the foreseeable future. In recent months, demand has weakened somewhat due to the gloomy economic outlook, high financing costs and high prices. The majority of real estate experts are now assuming that demand and therefore prices will rise again slightly due to falling financing costs. Although prices will rise by an average of 1 to 1.50 percent in 2024, the risk of a real estate bubble is decreasing. According to the UBS Real Estate Bubble Index, the risk is low. The index fell from 0.95 to 0.74 in the second quarter of 2024 and is therefore well below the value of the early 1990s (2.34), when real estate in Switzerland lost up to 40 percent of its value.
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Some market participants were expecting a larger interest rate cut. After the media conference, Reuters surveyed 32 financial market experts: 16 expect no interest rate cut on December 12, 2024, 15 expect a cut of 0.25 percent to 0.75 percent. The strength of the Swiss franc speaks in favor of a further interest rate cut. In the last three months, the franc has gained 2.9 percent against the euro and 6.7 percent against the dollar. A strong franc harms export-oriented industry, while a weak franc increases the risk of higher imported inflation. The Economic Research Center at the University of Zurich also believes that the SNB will lower the key interest rate to 0.75% because inflationary pressure is easing. It expects inflation to reach 1.2% in 2024 and 0.7% in 2025 and 2026. In conclusion, the new SNB Chairman Martin Schlegel will probably announce a further interest rate cut on December 12. Provided the economic and geopolitical uncertainties do not throw a wrench in the SNB's plans.
Our mortgage interest rate forecast until the end of 2024:
* Indicative interest rates on September 26, 2024 at 12 noon. The interest rates were determined by UBS key4 mortgages on the basis of these parameters: Canton of Zurich, loan amount CHF 500,000, affordability 20 percent, loan-to-value 50 percent, disbursement date September 27, 2024. These interest rates are not a binding financing offer.
According to long-term studies, money market mortgages such as the SARON mortgage were cheaper than fixed-rate mortgages in the past. Since October and November 2023, short and long-term mortgages have been cheaper than the SARON mortgage. This is unusual. Anyone expecting mortgage rates to fall further should take out a fixed-rate mortgage with a short term of two or three years in order to bridge the uncertainty during the expected interest rate cuts and to be able to refinance more cheaply once the term has expired.
Rather than putting everything on one card or mortgage, it might make sense to spread the financing over different mortgage models and terms. This allows you to spread the interest rate risk while minimizing the risk of having to renew the entire amount at the worst possible moment, for example during a period of high interest rates. UBS key4 mortgages recommends this mix:
How you finance or refinance your home depends on more factors than just the current interest rate. Your personal and financial situation, future plans, risk capacity and assessment of mortgage interest rate trends play at least as important a role in choosing the right mortgage model and the right term. If in doubt, seek advice and compare offers, services and prices. The most favorable offer at first glance is not always the best offer for you.
