The decision to take out a mortgage is an important one and not an easy one to make. Particularly in times of low interest rates, mortgage holders are faced with the question of whether to choose a fixed-rate mortgage or a money market/SARON mortgage.
Fixed-rate mortgage, SARON mortgage and money market mortgage briefly explained
What is the difference between the various types of mortgage? This can be basically explained as follows: with a fixed-rate mortgage, the customer and the bank agree on the fixed term, amount and interest rate of a mortgage ‘today’. Neither the amount nor the interest rate can be changed or adjusted during the agreed term. The fixed-rate mortgage therefore offers planning security, as the mortgage holder knows exactly how high the future interest payments will be. This product therefore offers optimum protection against rising mortgage interest rates. FFixed-rate mortgages can usually be taken out with a term of 2 to 10 years. Of course, a fixed-rate mortgage can also have it’s disadvantages. On the one hand, the interest rates of fixed-rate mortgages are higher than those of money market or SARON mortgages, as fixed-rate mortgages include a forward, similar to an insurance premium, when the yield curve is regular. On the other hand, mortgage holders with fixed-rate mortgages cannot benefit from future falling interest rates, and fixed-rate mortgages cannot be amortised early or even repaid in full.
Money market or SARON mortgages, on the other hand, are short-term financing products that are usually offered with a term of one to three months. As the interest rate for these two mortgage products is adjusted to the current interest rate level each time the tranche expires, they are much more exposed to the risks of market fluctuations. However, these mortgage products naturally benefit from falling interest rates and enjoy greater flexibility, as they can be partially or fully amortised at the end of the one- or three-month term. Finally it is of course possible to convert to a fixed-rate mortgage at any time.
Incidentally, the SARON (Swiss Average Rate Over Night) is a daily interest rate on the collateralised money market for Swiss francs and is closely based on the Swiss National Bank’s key interest rate. The banks calculate an average rate (compounded SARON) over three months, for example. The final SARON base rate for mortgages is therefore not known until the tranche expires.
A look back: costs of fixed-rate mortgages compared to variable-rate mortgages in recent years
Before we go into the question of whether now is the right time to convert existing short-term mortgages into long-term fixed-rate mortgages, a digression into the past is recommended. Studies show that mortgage borrowers who have only taken out short-term money market mortgages since 1991 have had to pay significantly less mortgage interest:
Initial situation: mortgage 500 000 francs, all figures in francs (rounded)
| 10-year period | Money market mortgage1) | 5-year fixed-rate mortgage | 10-year fixed-rate mortgage | Difference2) |
| 1993-2003 | 163 000 | 257 000 | 300 000 | 137 000 |
| 1994-2004 | 142 000 | 270 000 | 342 000 | 200 000 |
| 1995-2005 | 124 000 | 279 000 | 312 000 | 188 000 |
| 1996-2006 | 116 000 | 249 000 | 299 000 | 183 000 |
| 1997-2007 | 115 000 | 220 000 | 235 000 | 120 000 |
| 1998-2008 | 121 000 | 180 000 | 231 000 | 110 000 |
| 1999-2009 | 122 000 | 190 000 | 221 000 | 99 000 |
| 2000-2010 | 115 000 | 209 000 | 278 000 | 163 000 |
| 2001-2011 | 99 000 | 199 000 | 235 000 | 136 000 |
| 2002-2012 | 87 000 | 191 000 | 229 000 | 142 000 |
| 2003-2013 | 84 000 | 190 000 | 178 000 | 94 000 |
| 2004-2014 | 82 000 | 156 000 | 204 000 | 122 000 |
| 2005-2015 | 79 000 | 124 000 | 161 000 | 82 000 |
| 2006-2016 | 74 000 | 148 000 | 199 000 | 125 000 |
| 2007-2017 | 65 000 | 140 000 | 226 000 | 161 000 |
| 2008-2018 | 52 000 | 156 000 | 239 000 | 187 000 |
| 2009-2019 | 43 000 | 106 000 | 187 000 | 144 000 |
| 2010-2020 | 42 000 | 96 000 | 151 000 | 109 000 |
| 2011-2021 | 41 000 | 83 000 | 153 000 | 112 000 |
| 2012-2022 | 40 000 | 60 000 | 94 000 | 54 000 |
| 2013-2023 | 44 000 | 69 000 | 115 000 | 71 000 |
| ∅ Interest costs3) | 88 000 | 170 000 | 219 000 | 130 000 |
1) Based on the 3-month Libor (SARON from 2022) / 2) Difference between most expensive/cheapest model / 3) Average of all 10-year periods since 1993 / Source: VZ VermögensZentrum
For example, anyone who took out a ten-year fixed-rate mortgage in the period from 2013 to 2023 would pay a total of CHF 115 000 in interest over these ten years with a mortgage of CHF 500 000. The interest on a money market mortgage totalled CHF 44 000 over the same period, and a total of CHF 69 000 was paid for two consecutive five-year fixed-rate mortgages. The money market mortgage was therefore the most favourable financing option for the period from 2013 to 2023. The same picture can be seen for all financing periods since 1993.
Is a fixed-rate mortgage recommended?
This depends above all on the individual case. Following the surprising and substantial interest rate increases in 2022, the Swiss National Bank’s key interest rates have been significantly reduced again in recent months. Bank Julius Baer & Co. Ltd. is forecasting further interest rate cuts in the short term. However, the Bank Julius Baer & Co. Ltd. expects that medium to long-term interest rates could soon bottom out.
However, the final decision should not be driven solely by economic considerations. As mentioned above, a fixed-rate mortgage reduces the borrower’s flexibility. So anyone who likes to amortise quickly, is expecting a major liquidity event in the near future or is even planning to sell their property in the next few years should not take out a fixed-rate mortgage. On the other hand, if you are about to retire, or if one of the spouses wants to take a shorter career break due to parental leave, which means a reduction in income, a fixed-rate mortgage should give you more planning security for the future. These are just a few examples of how the decision can be influenced by factors that are not limited to the possible future interest rate.
Simple basic rules of mortgage financing
- So-called ‘quick fixes’ should be avoided. A mortgage is a long-term product and should be assessed as such. A supposedly correct decision today could turn out to be the wrong decision for the future.
- Before deciding on the financing product, the mortgage holder must consider what the financing could look like in the future and what life events will occur that are already known (retirement, marriage, children, relocation, inheritance, etc.). Such events must be taken into account in the decision.
- If you are risk-averse, it is better to take out a fixed-rate mortgage.
- Diversification is not only important for financial investments, but also for mortgages - a combination of money market mortgage and fixed-rate mortgage is a sensible consideration.
- Always seek a personal discussion and make sure that the bank you choose wants to enter into a long-term partnership with you and is not just looking for a short-term deal. In addition, a real estate transaction involves many facets: tax law issues, asset development, changes to the property such as its sale. All these questions need to be clarified by experts. You should therefore look for a partner who can also support you competently in such matters at any time.
Bank Julius Baer & Co. Ltd.
About the author: Gianfranco Bibbo is a Swiss Certified Banking Specialist and has been Head of Mortgage Advisory Switzerland at Bank Julius Baer & Co. Ltd. since 2016. He has been with the bank since 2005, working almost exclusively in the mortgage sector. Prior to that, he worked for 8 years in the private and corporate client business of a retail bank. In total, Gianfranco Bibbo has almost 30 years of experience in the Swiss mortgage business.
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