Many banks and mortgage brokers recommend homeowners to take advantage of the current low interest rates and take out long-term mortgages now. But interest rates could fall even lower.
Posted today at 12:34 pm—
–Those who build currently pay little interest on mortgages. Further rate cuts cannot be ruled out.
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Long-term fixed-rate mortgages are currently a big hit. 53 percent of all mortgages that the broker Moneypark took out in the first half of the year had a term of ten years. Another 27 percent even have a term of eleven years or more. The reason for this is the temptingly low interest rates. Usually customers pay higher interest rates for long-term mortgages than for short-term mortgages – this compensates the bank for the greater risk over the longer term. But at the moment there is hardly any trace of this rule. The interest rates for long-term and short-term mortgages have converged sharply in recent years.
The cheapest ten-year mortgage is now available at Moneypark for 0.7 percent, a two-year for 0.51 percent. With a mortgage of 100,000 francs, that only makes a difference of 190 francs per year. Even a seven-year fixed-rate mortgage was temporarily cheaper than a Libor mortgage with flexible interest rates, says Stefan Heitmann, CEO and founder of Moneypark. Due to the small price differences, it is not surprising that homeowners are opting for long-term mortgages in droves: For a small surcharge, they get planning security for a long time and protect themselves against any interest rate increases in the coming years.
Wait with long-term contracts
However, interest rates could soon fall even further. And clearly. Adrian Wenger, mortgage expert at VZ Vermögenszentrum, is convinced of this. He therefore advises against concluding long-term mortgage contracts now.
Wenger refers to the interest on savings accounts. The interest rate there is usually 0 percent today. Since banks finance loans to a large extent with funds from savings accounts, they also assume a minimum rate of 0 percent for mortgages. Then there is the margin. Last year, the Federal Supreme Court followed this line of argument in a case involving negative interest on loans (Read more here). In other words, as long as the interest rate on savings accounts is 0, mortgage rates won’t go below 0 plus a margin for the bank.
But the interest income on savings accounts is under pressure: For large amounts, financial institutions are already deducting negative interest from their customers. And the limit for this sinks, since the banks can only deposit liquid funds with the National Bank at minus interest. “In the past few months there has been relief for banks because they could give available money to companies as Covid-19 loans,” says Wenger. He expects that more and more negative interest will be charged on savings accounts if the banks have to deposit more money with the National Bank again.
If the pressure continues to rise and money in savings accounts is increasingly being paid less than 0 percent interest, this would also have noticeable consequences for mortgage interest rates. Wenger expects that the already low interest rates on mortgages will fall significantly again “if the zero limit for savings accounts is blown”. The free mortgage, which was unimaginable a few years ago, would then become a reality.
Indicators of rate cuts
An indication of a further reduction in interest rates is the aforementioned convergence in the rates of short-term and long-term mortgages. “Banks are increasing the incentive for their customers to conclude long-term contracts,” says mortgage expert Wenger from VZ Vermögenszentrum. Because if a bank assumes that interest rates will fall, the fixed-rate mortgage is an advantage. Heitmann puts the pressure of competition into perspective as a further reason for the convergence of interest rates: “Pension funds are increasingly offering long-term mortgages on attractive terms.”
Another indication is the duration of framework agreements. Such contracts exist with Libor mortgages, where the interest rates change at short notice. Customers usually commit to this model with such framework agreements for a period of three to five years. But at the moment, according to Wenger, most banks no longer have such a term. That indicates upheavals in the interest rate market. Wenger cites the main reason for this that banks wanted to keep more room for margin adjustments. Heitmann gives another reason for the lack of framework times: the system change from the Libor to the Saron rate will be implemented by the end of 2021.
“2021 will be an exciting year in terms of mortgage interest rates,” Wenger predicts. If his forecast is correct and interest rates actually remain low for a long time, homeowners can save costs on short-term mortgages. From Heitmann’s point of view, however, due to the various economic risks, there are several arguments in favor of securing the current low interest rates in the long term. However, the two experts agree on one point: After a brief rise during the lockdown, interest rates will remain at a low level for a long time to come.
Posted today at 12:34 pm-
