2020 is one of the better years for Swiss franc foreign currency borrowers: the euro is just as high (or low) against the Swiss franc as it was at the beginning of the year. Most do not pay any interest. This saves you money month after month compared to debtors in euros. Will this trend continue in 2021? Have the risks of a Swiss franc loan really vanished into thin air?
For most of Austria’s Swiss franc borrowers, it is a plus-minus-zero business. It is true that the euro is weakening by an average of 2% each year against the Swiss franc. However, you do not pay any interest for this, and so you get the exchange rate loss back.
Austria’s banks are currently offering housing loans at around 2% annual interest. This is the reference value for a Swiss franc borrower. He is faced with the choice of staying in his Swiss franc loan and continuing to pay no interest. Or he converts to a euro loan.
- In 2015-2020, exchange rate losses were significantly higher than interest savings.
- 2017 was the only year in which the exchange rate went well for a Swiss franc borrower. The euro rose strongly.
Looking ahead, timing matters. In addition, it is important to keep in mind that sitting out a Swiss franc loan is also like going to the casino.
An example: A loan from a Swiss franc borrower is due at the end of 2021:
If the borrower is lucky, the euro will appreciate 3% next year to 1.11 francs. In 2022, the euro will then lose 5% and thus reach its average annual depreciation rate of 2% again. The Swiss franc borrower does not care because he got out at a euro-franc exchange rate of 1.11.
If he is unlucky, the euro will fall by an above-average 5% to CHF 1.03 by the time his loan falls due. The three percent countermovement of the euro to 1.06 francs only sets in after he has paid back his loan.
Important considerations
Nobody can predict how the euro-franc exchange rate will develop over the next few years. The only thing that is certain is that it will decrease by an average of 2% every year until 2025/2030.
When the bank makes the loan due in accordance with the contract, the savings in interest are over. No bank in Austria will grant the debtor another interest-free loan.
Calendar years in which the euro appreciates against the franc are rare. For a borrower, the chance of finding a situation when his loan falls due is low in which he saves 2% on interest and on top of that gets a stronger euro against the Swiss franc.
If the euro makes it to or above 1.10 francs in the coming weeks or months, you should therefore give in to the pressure from banks and the Financial Market Authority (FMA) and draw a line under your franc loan.
Even the current euro rate of 1.08 francs is an acceptable exit rate. You have saved the 2% interest pa and are spared an exchange rate loss compared to the previous year.
It would not be a surprise if the euro fell to CHF 1.06 in the last few weeks of the year. At the moment it doesn’t look like it. The likelihood of such a relapse is around 40%. But that can change within a few days.
Continue reading:
Swiss franc credit shock: AT gets away with a black eye
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