On June 20, the Swiss National Bank (SNB) lowered its key interest rate from 1.50 to 1.25 percent. This is the second cut after the surprising cut in the key interest rate from 1.75 to 1.50 percent on March 21. Prior to the second monetary policy assessment of the three-member SNB Governing Board this year, experts were divided on whether the SNB would lower the key interest rate. This is shown by surveys conducted by two news agencies: 22 of the 33 analysts surveyed by Reuters expected a rate cut, but only eight of the 20 analysts surveyed by AWP did. Many were uncertain and rated the probability of their forecast lower than usual. As two interest rate cuts of 25 basis points each by the end of 2024 had already been priced in for some time, capital market interest rates barely reacted to the SNB's decision.
In May, year-on-year inflation in the US fell from 4% to 3.3% and in the eurozone from 6.1% to 2.6%. Although this is still well above inflation in Switzerland (1.4%), it is well below the highs of 2022, when central banks began to combat inflation by raising key interest rates. The European Central Bank lowered its key interest rate for the first time in almost five years at the beginning of June, while the US Federal Reserve is still waiting.
Price stability is the SNB's top priority. Inflation in Switzerland is among the lowest of all major economies and has been back within the SNB's target range of 0 to 2 percent since mid-2023. Inflationary pressure has decreased in recent months. This is likely to have been the main reason for the reduction. "The underlying inflationary pressure has fallen again compared to the previous quarter", said SNB Chairman Thomas Jordan during the monetary policy assessment, "by lowering the SNB policy rate, the SNB can maintain appropriate monetary conditions". By lowering the interest rate, the SNB is also keeping the interest rate differential to the eurozone constant after the European Central Bank lowered its key interest rate to 4.25 percent on June 12. A franc that is too strong harms our export-oriented industry, while one that is too weak increases the risk of higher imported inflation. Monetary policy is a balancing act.
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The interest rate decision had already been priced into interest rates for a while. As a result, neither money market nor capital market interest rates reacted to the interest rate cut. In his monetary policy assessment, Thomas Jordan emphasized that the SNB will continue to monitor inflation developments closely and adjust its monetary policy if necessary to ensure that inflation remains within the price stability range in the medium term. The SNB now expects inflation to fall to 1.3 percent this year and to 1 percent by mid-2026. In December 2023, it was still forecasting 2.2 percent for 2024 and 1.9 percent for 2025. However, it is somewhat less confident about the economy than before and expects economic growth of just 1 percent this year and 1.5 percent next year.
If you have financed your home with a SARON mortgage, you benefit directly because SARON is linked to the prime rate. A SARON mortgage now costs 1.70 percent or more (1.20 percent plus at least 50 basis points credit rating margin). If you have financed your home with a fixed-rate mortgage or would like to finance your property purchase with a fixed-rate mortgage, little will change. The market has priced in 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 slightly since the first monetary policy assessment in 2024. On June 20, 2024, for example, a ten-year fixed-rate mortgage with UBS key4 mortgages cost at least 1.79%* or 11 basis points less than on March 21, 2024. SARON mortgages have cost more than fixed-rate mortgages since the beginning of October 2023 (short terms) and the beginning of November 2023 (long terms).
The SARON reference interest rate is directly linked to the prime 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 to the nearest franc and centime will sleep more soundly with a fixed-rate mortgage.
The easing inflationary pressure and the prospect of further falls in mortgage interest rates (see "How are mortgage interest rates developing?") are providing relief for both property buyers and property owners who need to extend or redeem a mortgage in the foreseeable future. The majority of real estate experts expect the real estate market to stabilize at a high level. The gloomy economic outlook, high financing costs and high price levels are putting pressure on demand. Although prices will rise by an average of 1 to 1.50 percent in 2024, the risk of a real estate bubble is likely to decrease. According to the UBS Real Estate Bubble Index, the risk of a real estate bubble is low. The index fell from 1.22 to 0.95 in the first 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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Most market participants assumed that the SNB would lower the key interest rate in two steps from 1.50 percent to 1.25 percent to 1.00 percent by the end of the year. The majority expected the first rate cut in the fall and the second in the winter. Following the key interest rate cut on June 20, most market participants are sticking to their key interest rate forecast of 1 percent by the end of the year. Whether on September 26 or December 12 is ultimately irrelevant - mortgage rates will fall by the end of 2024. Provided that economic and geopolitical uncertainties do not throw a spanner in the works for the SNB.
Our forecast until the end of 2024:
* Indicative interest rates on June 20, 2024 at 12 noon. The interest rates were determined by UBS key4 mortgages on the basis of these parameters: Canton of Zurich, loan amount 500,000 Swiss francs, affordability 20 percent, loan-to-value 50 percent, disbursement date June 21, 2024. These interest rates are not a binding financing offer.
The monetary policy assessment on September 26, 2024 will be the last with long-serving SNB Chairman Thomas Jordan. A successor has not yet been appointed.
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 who, like most market participants, expects mortgage interest rates to fall should take out a fixed-rate mortgage with a term of two or three years to bridge the uncertainty during the expected interest rate cuts and to be able to refinance more cheaply once the term expires.
It makes sense not to put everything on one mortgage, but to spread the financing over various mortgage models and terms. In this way, you spread the interest rate risk and at the same time minimize 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 the current interest rate. Your financial situation, your future plans, your risk capacity and your assessment of the development of mortgage interest rates play an equally important role in the choice of mortgage model and terms. If in doubt, seek advice and compare offers. This is even more important than usual in uncertain times. The most favorable offer at first glance is not always the best offer for you.
