In addition to the right mortgage model, you should also carefully consider the term. Play through different scenarios of interest rate development before making your decision.
At the moment, the interest rate outlook for real estate investors in Switzerland is positive for both short- and long-term mortgages. For flex rollover mortgages (Libor mortgages), they are at 1.02%. You can expect 1.04% for fixed-rate mortgages with a three-year term, 1.13% with a five-year term, and 1.62% with a ten-year mortgage. A 15-year mortgage has an interest rate of 2.0%. Although a slight increase is expected over the next few months because banks need to protect themselves due to the negative interest, the interest rate differences between the term variants remain small, giving the debtor more leeway.
The classic model: fixed-rate mortgage
Many Swiss citizens choose to take out several fixed-rate mortgages with different terms in order to distribute the risk of interest rate increases over several years. For example, they might divide their mortgage debt into three or two equal parts with terms of three, six and ten or five and ten years. In the event that interest rates have risen at the end of the first mortgage’s term, only one third or half of the mortgage debt must be renewed at a higher interest rate, while the longer-term mortgages continue to run at the lower interest rate for the remaining term of three and seven or five years.
In the event of stable or lower interest rates, on the other hand, you maintain the same term distribution. For example, in the case of a debt divided into three parts you replace the expired 3-year mortgage with a 10-year mortgage. The same applies when the 6-year mortgage ends. Reasoning: You need a buffer of three to four years between your mortgages’ due dates. As a consequence, you will only take out mortgages with very long terms in the long run. However, these are usually more expensive than short-term variants. This means that while you initially lower your interest rate risk, you pay more in the long run. Therefore, it is advisable to consider your financial own capital as well as interest rate development before deciding on a fixed-rate mortgage with a Swiss bank.
Expected interest rates and their consequences
To see how interest rate development influences your household budget, you should play through three ten-year scenarios to determine the monthly mortgage interest in the event of falling, stable or rising interest rates.
In the case of falling interest rates, you should choose either fixed-rate mortgages with short terms or a Libor mortgage. The same applies when interest rates are expected to remain stable, since the interest curve means that you usually pay more interest for long-term debt than for short-term loans. The difference can be as substantial as 1%. The only case in which it makes sense to take advantage of the current low interest rates and secure them by means of a long-term fixed-rate mortgage is if you expect interest rates in Switzerland to rise. If interest rates rise from 3% to 5% over ten years, for example, you will pay less if your fixed-rate mortgage’s interest rate is below 4%.
In light of the key interest rates, most Swiss banks expect the interest rates for flex rollover mortgages (Libor mortgages) to remain low. The interest rates for fixed-rate mortgages with medium and long terms increased noticeably after the U.S. presidential election, but have now recovered slightly. However, experts expect another slight increase by 10 to 15 basis points, whereas the rates for shorter terms are expected to continue to stagnate. You must always be aware of the chance of sudden interest rate fluctuations – this is true for all term variants.
The right mix
Combining different mortgages and terms based on your personal risk profile is a good option. This individual mix of security and flexibility allows you to take changes in interest rates into account while reducing your risk of having to renew the full amount of the mortgage in a high interest rate environment. Depending on your risk tolerance, fixed-rate mortgages with staggered terms or a combination of fixed-rate and Libor mortgage are worth considering.