Choosing the right mortgage—whether it’s a SARON mortgage linked to the money market or a fixed-rate mortgage with a constant interest rate—can significantly impact your financing. Below, we explain why a combination of both models might be beneficial and what other aspects should be considered when developing an effective financing strategy.
Mortgage Models – An Overview
SARON Mortgage
The SARON mortgage is a money market mortgage with a variable interest rate based on the Swiss Average Rate Overnight (SARON). This type is particularly suitable for those who desire financial flexibility, expect falling interest rates, and are willing to accept some interest rate fluctuations.
- Interest Rate: Variable, based on SARON, usually adjusted every three months.
- Term: Open-ended, typically with a notice period of a few months. At some banks, switching to a fixed mortgage is possible at any time.
- Interest Rate Risk: Higher, as interest rates can be subject to short-term fluctuations.
Fixed-Rate Mortgage
In contrast, a fixed-rate mortgage offers a fixed interest rate over the entire term, enabling predictable payments and protection against rising interest rates.
- Interest Rate: Fixed over the agreed term. At some banks, the rate can be locked in up to 12 months in advance with a small surcharge (Forward Mortgage).
- Term: Fixed, usually between two and ten years.
- Interest Rate Risk: Lower during the term, but potential risk at refinancing.
Mortgage Mix: Combining Different Models
A mortgage mix combines different types of mortgages and terms, often referred to as tranches. This can help minimize interest rate risk and take advantage of both mortgage forms.
Example of a Mortgage Mix
- Part of the financing as a SARON mortgage: Takes advantage of lower interest rates and offers flexibility.
- Part as a fixed-rate mortgage: Secures a fixed interest rate, increasing predictability and providing protection against interest rate hikes.
With this approach, you can respond flexibly to interest rate changes while securing part of your mortgage against rising rates. By dividing your total mortgage into multiple tranches with different terms (e.g., one tranche with a three-year term and another with an eight-year term), you can further spread your interest rate risk. This prevents you from having to refinance your entire mortgage at a potentially unfavorable time.
Combining SARON and fixed-rate mortgages and strategically dividing them into tranches with different terms can be an effective method to maximize flexibility while ensuring financial security. It is advisable to regularly review these options with a mortgage advisor and adjust as needed.
Additional Tips and Tricks on Mortgages
Choosing the right mortgage is crucial for your financial health. We spoke with our financing specialists and summarized the seven most important tips below to help you make an informed decision:
- Thoroughly Assess Your Financial Situation “Before taking out a mortgage, it’s important to conduct a thorough analysis of your financial situation. Determine your income, debts, and monthly expenses to figure out how much you can afford without overextending yourself,” explains Sven Ortega, Head of Financing Consulting at the Homeowners Association of Switzerland.
- Understand Different Mortgage Types This article provides an initial overview, but it’s definitely recommended to learn more about the various available mortgage types. Each form offers specific advantages and disadvantages. Depending on your financial situation, preferences, and risk tolerance, a different solution may be best suited.
- Compare Offers “Don’t take out a mortgage after your first meeting with your bank. Take the time to compare mortgage offers from different providers. Look not only at interest rates but also at fees, the flexibility of terms, and other important factors,” advises Ortega. The team at the Homeowners Association of Switzerland is happy to help you find the best interest rate on the market.
- Negotiate Terms Yves Augsburger, Senior Mortgage Expert, adds, “Don’t be afraid to negotiate the terms of your mortgage. Sometimes you can achieve better conditions by asking for a reduction in interest rates or other adjustments that lower your overall costs over the life of the mortgage. Talking to people helps.” Here too, the experienced team led by Sven Ortega and Yves Augsburger is ready to assist you.
- Understand Interest Rate Trends Understanding interest rate trends and the corresponding influencing factors can help you choose the right time to take out a mortgage. It’s a good idea to occasionally check the business section of the newspaper or visit the Swiss National Bank (SNB) website to stay informed about monetary policy developments. Bank forecasts should be taken with a grain of salt, but they can also serve as a guide.
- Plan Long-Term “Think beyond the immediate future and consider your long-term financial goals. How will your financial situation develop in five, ten, or even twenty years? Plan for future changes in income or major expenses like education costs or retirement,” says Simon Purtscheller, Mortgage Expert at the Homeowners Association of Switzerland.
- Seek Professional Advice Finally, it’s often wise to seek professional advice. A mortgage advisor or financial planner can help you make the best decisions based on your personal financial situation and long-term goals.
By following these tips, you’ll be better prepared to choose a mortgage that not only meets your current needs but also secures your financial future.
