Swiss National Bank Interest Rate Cut Leads to Soaring Saron Mortgage Refinancing Costs: Analysis and Best Financing Strategies

The interest rate cut by the Swiss National Bank (SNB) on March 21 does not hide the fact that the refinancing costs for the Saron mortgage have gone through the roof in the last two years. ‘ gone. In April 2022, the main interest rate for the Saron was less than 0.75 percent before the SNB raised it by 2.50 percent to 1.75 percent within 15 months. In the meantime, this led to a significant increase in Saron’s mortgage refinancing costs – and accordingly hit the wallet.

If the bank’s markup on the Saron mortgage is one percent, variable mortgage interest rates came to around 2.70 percent accrued between the last prime rate increase in June 2023 and the first decrease in March 2024. In contrast, ‘ rates for fixed rate mortgages will rise much more slowly. A ten-year fixed-rate mortgage costs about 1.0 percent in spring 2022 and peaks at 2.70 percent in 2023.

The increase for the Saron, with an increase of 2.25 percentage points, was significantly higher than for a fixed rate mortgage with 1.70 percentage points. So Saron’s variable mortgage was significantly more susceptible to fluctuations than a fixed rate mortgage in the most recent interest rate hike cycle.

High fluctuations in prime interest rates reduce the ability to plan expenses

If you want to avoid these fluctuations in refinancing costs entirely, you can finance yourself 100 percent with a fixed rate mortgage. However, this is not the best solution as the Saron mortgage has been the cheapest financing option for the past fifteen years.

ING Bank recently investigated the question of whether variable or fixed funding is the best solution in an investigation. The study evaluated empirical data from the US, the Eurozone and Japan. To keep the fluctuations in costs as low as possible, financing with 18 percent variable and 82 percent fixed term is a good choice in the US. In the Eurozone, over the past twenty years, equity financing has achieved the greatest planning security with the lowest fluctuations in terms of total costs.

With zero interest rates, variable financing has an advantage

Apart from the Eurozone, Japan is also of interest to Swiss mortgage lenders. Key interest rates were negative in both Europe and Japan. 100 percent financing in euros with a fixed term – not surprisingly – not only had the highest financing costs but also the greatest risk of cost changes.

The minimum stability of euro loans with variable interest is unusual. This can be explained by the stability brought about by the European Central Bank’s (ECB) zero interest rate monetary policy and by the pre-pandemic hope that the ECB would forever break away from the rate anchor flat near zero. In finding the efficiency limit in euro financing, the study reaches a clear conclusion: “Here, a combination of 60 percent variable interest and 40 percent fixed interest leads to the cost fluctuations lowest,” explained ING analyst Padraic Garvey.

In Asia, where the Japanese central bank pursued an even more extreme zero interest rate policy for decades, funding costs with 100 percent variable-rate financing are very low—with very little volatility. Conversely, 100 percent fixed funding led to both higher funding costs and higher volatility.

Local mortgage lenders who have been 100 percent dependent on Saron’s fluctuating finances over the past ten years will see this confirmed by the data from Japan. The comparison between the US, Japan and the Eurozone also shows that the choice of mortgage maturities should be reconsidered in an environment without zero interest rates. The higher the interest rates (USA) compared to (Switzerland, Japan, Eurozone), the more attractive a higher proportion of fixed terms.

In order for the Saron mortgage to be significantly cheaper than a pooled financing option, the prime interest rates in Switzerland would have to move to zero again. According to the interest rate forecast published by UBS economists on Wednesday, this situation would occur if the world economy fell into a prolonged recession and thus the franc would come under strong upward pressure.

But there is no sign of a decline at the moment. Although key interest rates are expected to continue to fall in Switzerland, they are not currently expected to fall below one percent. At least that is the consensus of Swiss economists surveyed by Bloomberg in mid-April. They expect the key interest rate to be one percent between 2025 and 2026.

The right combination makes all the difference

This possibility of one or two key interest rate cuts of 0.25 percentage points each has already priced into the Swiss capital market over the next eight to fifteen months. If this forecast comes true as the markets expect, the Saron rate will fall from 1.50 to 1.00 percent.

Window prices for fixed-rate mortgages with a term of two to seven years at hypotheke.ch are currently around 1.68 to 1.73 percent, while up to 2.50 percent are still available for the Saron mortgage. Even if the SNB now reduces key interest rates to one percent as expected, the costs for a Saron mortgage with a future rate of 2.00 percent will be higher than for a fixed rate mortgage.

So the conclusion is clear: Taking into account the variations in funding costs, a proportion of 25 to 40 percent fixed rate mortgage and 60 to 75 percent Saron mortgage seems sensible. If you want a high level of planning security and low changes in costs, you would be well advised to take out a higher fixed rate mortgage installment. When it comes to fixed rate mortgages, different terms should be combined.

Anyone who sees a recession on the horizon can stay 100 percent invested in Saron. However, the Saron mortgage borrower must be aware that the costs may remain higher compared to the fixed rate mortgage if interest rate cuts do not come as quickly as expected.