Are you looking to get a new mortgage or to refinance your existing mortgage? This guide from moneyland.ch explains how to prepare and what to pay attention to when choosing a mortgage.
Whether you are getting a new mortgage or refinancing an old mortgage, there is a lot of money at stake. Going about it correctly could save you thousands of francs in interest payments each year. Instead of going straight to your everyday bank, hurried and poorly prepared, to get a mortgage, you should carefully plan well in advance, and get informed about current interest rates. This moneyland.ch guide explains what you should pay attention to.
1. Compare mortgage interest rates
Get a good overview of current mortgage interest rates ahead of time. You can do that using the independent, unbiased mortgage comparison on moneyland.ch. The comparison lists daily-updated guide mortgage rates for more than 140 different mortgage offers.
Which exact interest rate you get depends on other factors like your creditworthiness and your negotiation skills. But comparing guide interest rates is still useful because it helps you identify the most affordable lenders, and get a picture of what the current rates are.
Example: If one mortgage offer has an annual interest rate that is just 0.5 percentage points lower than that of another mortgage offer, you could save 4000 francs per year on an 800,000-franc mortgage by choosing the cheaper lender.
2. Get quotes
Once you have found several cheap mortgages, you should request quotes from each of those lenders. That may require some effort, but it benefits you because you get to see the actual interest rates that apply to you individually based on your creditworthiness. In contrast to the published guide interest rates, the actual quoted rates are much more valuable. Having quotes that you can show also gives you a basis on which to negotiate with other lenders.
Just bear in mind that mortgage interest rates change on an ongoing basis. If you wait long in between getting quotes from different lenders, you will not be able to compare the quotes with each other directly.
If you do not want to request quotes yourself, you can use a mortgage broker (see point 7).
3. Negotiate
The guide interest rates published by banks are generally open to negotiation. Most banks say that the guide rates apply to borrowers with good creditworthiness, but that does not mean that you cannot negotiate just because you do not have perfect creditworthiness. Competition in the Swiss mortgage market is strong. It is often possible to bargain down the mortgage interest rates offered by banks and insurance companies.
Even if you want to stick with your everyday bank only, there is still room to negotiate when you get a new mortgage or extend an existing mortgage. You can improve your bargaining position by showing your bank a low competing offer from a different lender. In some cases, simply referring to lower guide rates in the moneyland.ch mortgage comparison is enough.
Exception: In the case of online mortgages, the advertised interest rates are often fixed, and are not negotiable.
4. Choose the right mortgage model
When choosing a mortgage, you will normally be confronted with the question of whether you should get a fixed-rate mortgage or a SARON mortgage. You will also have to decide how long the mortgage term should be (or the contract term, in the case of a SARON mortgage).
If being able to plan in advance is important to you, or if you believe that mortgage interest rates will climb over the long term, then you should choose a fixed-rate mortgage with a long mortgage term.
Otherwise, you should consider getting a SARON mortgage. In the past, SARON mortgages (and their LIBOR mortgage predecessors) have almost always worked out cheaper than fixed-rate mortgages.
Also take time to consider the likelihood of your having to sell the property – due to having more children or because of a divorce, for example. If you have reason to believe that you may sell the property in the foreseeable future, then you should get a mortgage with a short term. Important: SARON mortgages have a contract term during which you cannot simply terminate the mortgage without penalties.
Do not confuse SARON mortgages with adjustable-rate mortgages. Adjustable-rate mortgages can be terminated with relatively short notice. However, they also cost much more than fixed-rate and SARON mortgages, so using them is not normally a good financial move. Good to know: If you need a flexible mortgage solution, there are SARON mortgages with terms as short as those of adjustable-rate mortgages, but with much lower interest rates.
Some service providers recommend dividing your mortgage into multiple smaller mortgages, each with a different mortgage term. But this kind of splitting complicates your mortgage and makes changing mortgage providers more difficult, if the different mortgages have different terms. For that reason, you should generally avoid dividing your mortgage into tranches with different terms.
5. Account for online mortgages
Online mortgages differ from conventional mortgages in that they automate part of the application process, which often results in lower interest rates. On average, the interest rates of Swiss online mortgages are around 15 percent lower than the guide rates of conventional mortgages.
If you have experience with mortgages and do not need any consultation, then it is always worth checking online-only mortgage offers. Online mortgages are often used by experienced property owners to refinance existing mortgages or to replace expired mortgages.
6. Account for insurance companies and pension funds
Apart from banks, mortgages are also offered by Swiss insurance companies and pension funds. These lenders are often more selective than banks, but their interest rates are also lower, on average. For that reason, it is worth including offers from insurance companies and pension funds in your comparison, especially if you do not need comprehensive consultation or complicated mortgage models.
7. Consider using a mortgage broker
In some cases, it can make sense to use a mortgage broker. A reputable broker will have a better understanding of the market. Ideally, they will know how far down mortgage lenders are willing to negotiate to. Additionally, using a mortgage broker saves you the effort of comparing, requesting quotes, and negotiating with lenders. In addition to conventional mortgage brokers, there are also a number of online platforms that provide this service.
It is important to choose your mortgage broker carefully. Not all brokers are reputable and independent. Make sure to get as well informed about a brokers business model as possible before you make you of their services. For example, there are mortgage brokers that receive sales commissions from lenders – a practice that tends to result in your getting higher mortgage interest rates than would otherwise be possible.
You also cannot know for certain in advance that the broker will be able to get you a cheaper mortgage than you could get on your own.
8. Do not overestimate mortgage discounts
Many mortgage lenders offer discounts on their interest rates when certain conditions are fulfilled. These mortgage discounts are common in Switzerland:
Some banks offer so-called starter or welcome discounts for new mortgages. This discount applies to home buyers who are either getting a mortgage for the first time, or moving their mortgage to a new lender.
Family mortgage discounts are also widely offered. Normally, the requirement for getting this discount is that you are a family or a single parent with at least one child.
Many banks discount their mortgage interest rates for properties that meet certain energy-efficiency standards. The terms used for energy-efficiency discounts vary between lenders. The terms energy-efficient mortgage, green mortgage, or climate-efficient mortgages, among others, all refer to this discount. The energy-efficiency criteria used to determine whether a property qualifies also vary between mortgage lenders.
Discounts normally knock between 0.15 and 0.5 percentage points off the standard mortgage rates you qualify for. Be aware though, that normally, the discount only applies for a limited number of years (three years, for example), and to a limited mortgage amount (up to 300,000 francs, for example).
It is important not to overestimate the value of these discounts. By thoroughly comparing interest rates and negotiating carefully, you can often come out paying less than you would using mortgages with discounts.
9. Review the contract’s terms and conditions
The interest rate is not the only aspect of a mortgage offer to consider. You should also carefully review all of the contract’s terms and conditions.
You should pay especially close attention to these points:
If you have to terminate your fixed-rate mortgage ahead of schedule, you will have to compensate the mortgage lender financially. This penalty fee can be as high as tens of thousands of Swiss francs. The way in which the penalty is calculated varies broadly between lenders and contracts, so it is worth reading the fine print before you sign.
Normally, you cannot make additional, voluntary payments to pay off your mortgage during the loan term. If you want to be able to make additional amortization payments during the mortgage term, you have to make sure that the contract allows you to do that.
It can also be helpful to know the circumstances under which the bank can choose to terminate your mortgage. For example, some banks reserve the right to terminate your mortgage if the property’s value declines.
Banks may include a clause in their mortgage agreements which states that if the bank were to fail, your bank account balances will not be balanced against your mortgage debt. In other words, you would lose all your money, but you would still owe the mortgage debt. That only applies to the portion of your bank account balances at that bank which exceeds 100,000 francs, as that amount is secured by bank depositor protection. But if you have more than 100,000 francs at the bank, or expect to in the future, then you will want to check whether your prospective mortgage agreement includes this kind of clause.
Because the fine print can be extremely important in some cases, but is often difficult to understand, consulting an independent mortgage expert ahead of time can be beneficial.
10. Decide on the mortgage amount
Before you get a new mortgage, you should carefully consider how much of the property purchase you want to finance using a mortgage, and how much you will pay yourself as a down payment. Before you refinance an existing mortgage, you should consider whether it could be beneficial to raise or amortize your mortgage.
The bigger your mortgage is, the higher the loan-to-collateral ratio is. Carrying a large amount of mortgage debt can have both advantages and disadvantages.
Covering the bulk of your property purchase with mortgage debt has tax advantages. The bigger your overall tax burden is, the more important the tax benefits of carrying mortgage debt are. Secondly, when you carry mortgage debt instead of equity, your capital remains free instead of being tied down in the property. If you are able to invest your money profitably, then using a high loan-to-collateral ratio can make sense.
On the other hand, using a low loan-to-collateral ratio is more secure. Carrying large debts is always risky because there is always a chance that unforeseeable events could result in your having difficulties meeting your mortgage interest payments. In the worst case, you could lose your home.
How big your mortgage should be is a very complicated question, as many factors play a role. Of course, if you only have enough savings to cover the minimum required down payment, then you have no choice but to get the highest possible mortgage.
11. Direct or indirect amortization?
Young or less-wealthy home buyers in particular often have to use a secondary mortgage, because they do not have enough savings to pay off the full part of the mortgage that must be amortized. A secondary mortgage has to be completely paid off within a maximum of 15 years, but at the latest by the time you retire.
If you need a secondary mortgage, you should carefully consider whether to directly or indirectly amortize your mortgage. The moneyland.ch guide to indirect amortization can help you better understand when paying off a mortgage indirectly can benefit you.
If you decide to use indirect amortization, you should also look at how much interest the mortgage lender pays for pillar 3a account balances, or how much they charge for pillar 3a retirement funds. This is important because many mortgage lenders only let you use their own pillar 3a products for indirect amortization.
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