Should you renew your mortgage at a fixed rate? The real estate chronicle of Raiffeisen

You will surely have noticed this: rates for long-term mortgages have risen in recent weeks due to high inflation across the world and the subsequent reactions of central banks. Other rate hikes are not excluded, particularly on the side of the American Central Bank (Fed) which provides for several increases this year. The Fed would even consider raising interest rates above the equilibrium level estimated at around 2.5%, in order to actively rein in the economy.

For its part, the European Central Bank (ECB) is preparing to move away from negative rates from the second half of the year. As the upside risks to inflation have increased with the energy price shock, the rate forecasts have also come a little closer to fruition. In this context, long-term rates rose sharply in the United States and Europe. On the other hand, given the comparatively subdued inflation outlook in Switzerland, the Swiss National Bank (SNB) does not yet see any reason to follow suit quickly.

The SNB on the lookout

In Switzerland, mortgage rates have reached their highest level since 2014. They should continue to rise moderately, but a sharp reversal remains unlikely. Indeed, the rise in prices here is much lower than abroad, in particular because of the strength of the franc. So far, there are no signs of a more pronounced increase in wages and therefore of the onset of a price/wage spiral.

Although the SNB revised its inflation forecast sharply upwards for this year in March – bringing it from 1.0% to 2.1% – a decline to 0.9% is again expected for 2023, i.e. between 0% and 2%, which corresponds to the objective it has set itself. Raiffeisen economists estimate that the national bank should raise interest rates in the first quarter of 2023. Due to moderate inflation, however, no significant rate hikes are to be expected thereafter.

Variable or fixed mortgage

Despite the clouds gathering on the horizon for interest rates, financing conditions in Switzerland still remain attractive. Indeed, the rapid rise in interest rates has not had the same magnitude for all financing variants. It is above all the longer durations that have clearly increased. Thus, a 10-year fixed-rate mortgage cost at the beginning of April about 1% more than in December. Shorter durations, on the other hand, increased to a lesser extent.

Furthermore, financing linked to the money market hardly changed. The costs of a SARON mortgage are still as low as last year, at around 1%. We therefore always find very attractive financing conditions. Rates have simply moved away from the extremely low levels that we have grown accustomed to. It is therefore up to everyone to decide whether the price offered for a long-term fixed rate, allowing the risk of fluctuation to be reduced, is suitable for them. A mix of mortgages is also a possible strategy. In recent years, buying a home was in principle more advantageous than renting, even with very long mortgage terms.

Today, with higher long-term interest rates, this is no longer automatically the case. And in the future, other elements could also influence this choice. The plan to abolish the rental value tax currently being discussed in Parliament could in particular lead to the disappearance – at least in part – of the mortgage interest deduction. Hence the importance of carrying out a well-considered cost/benefit analysis and of benefiting from good professional advice.

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