The rise in long-term interest rates in recent months has had a significant impact on the choice of financing product when buying a home or extending an expiring mortgage. In June and July, for the first time, more money market mortgages (Saron) than fixed-rate mortgages were taken out. This is the conclusion of the new edition of the “Real Estate Market Switzerland” study by Raiffeisen.
As recently as February 2022, 80 percent of the outstanding mortgage volume in Switzerland was concluded with fixed interest rates, i.e. with fixed-rate mortgages. This is also the case with Raiffeisen Switzerland, which has a market share of around 20 percent. Then, as interest rates rose, so did the demand for adjustable rate mortgages that adjust to the market. In the months of June and July, the proportion of Saron mortgages rose to over 50 percent.
Product choice Mortgage transactions in Switzerland since the beginning of the year (Source: Raiffeisen Switzerland, Swiss National Bank)
“A veritable run on the still cheap Saron mortgages has set in parallel to the rise in longer-term capital market interest rates,” writes the Raiffeisen Economic Research Team headed by Martin Neff. The reason for this is clear: Fixed-rate mortgages have become significantly more expensive, while money market mortgages are still cheap. “Obviously, many mortgage customers currently rate the price for the imputed security offered by a fixed-rate mortgage as too high and switch to money market paper, which is still record-low,” the Raiffeisen economists continued.
In line with the trend, significantly fewer long-term fixed-rate mortgages are now being taken out in Switzerland. According to Raiffeisen, around 40 percent of all fixed-rate mortgages with terms of eight years and more were concluded by March. From May it was only around 33 percent. By contrast, the proportion of fixed-rate mortgages with terms of up to three years has increased.
SNB interest rate hike still without effects
The prices for fixed-interest mortgages in Switzerland have fallen again since mid-June. They are currently a little over 2 percent on average. According to hypotheke.ch, the cheapest ten-year fixed mortgage is available for 1.72 percent. A Saron mortgage (three months) has an interest rate of 0.44 percent.
Even the first rate hike by the Swiss National Bank on June 16 did nothing to change the trend towards the Saron mortgage. On that day, the SNB decided to raise the key interest rate from minus 0.75 percent to minus 0.25 percent. Many mortgage customers are trusting that the National Bank will keep inflation under control in this country and will only raise interest rates moderately in the future, Raiffeisen continues in the study.
Mortgage customers naturally take much greater risks with Saron products than with fixed-rate mortgages. Because if the SNB were forced to “raise the key interest rates extremely quickly and massively” in order, for example, to combat inflation that is still getting out of control, the starting point would change quickly. “We consider such a scenario to be almost impossible,” writes Raiffeisen.
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