Saron Mortgages Are No Longer Cheaper Than Fixed-Rate Mortgages

Last month’s decision by the Swiss National Bank (SNB) not to raise its key interest rate came as a surprise for most experts. Since then, the average guide interest rates for fixed-rate mortgages (FRMs) have sunk slightly, while the interest rates of SARON mortgages have remained the same. The result is that the interest rates of SARON mortgages now sit at the same level as those of FRMs, a situation which has not occurred for some time now. But in spite of the current situation, SARON mortgages can still work out cheaper than FRMs in the long term.

Current interest rates for fixed-rate mortgages

The average interest rates of two-year and five-year FRMs are currently both 2.57 percent per annum. The average rate for ten-year FRMs is 2.71 percent. The average rates are somewhat lower than those we saw at the start of the year. It is interesting to note that long-term FRMs have returned to costing more than short-term FRMs. A month ago, the cost of long-term and short-term FRMs was practically identical, and interest rates were slightly higher than they are today.

SARON mortgages are getting more expensive

Before the SNB raised its key interest rate into a positive figure on September 22, 2022, the average interest rate for SARON mortgages was 0.93 percent per annum. Interest rates of SARON mortgages are a combination of the SARON index (more precisely, the compounded SARON) and a markup added by the lender, so in the absence of a positive SARON rate, the 0.93 percent was made up completely of the lender’s markup. But with the SNBs move towards a tighter financial policy, the average annual interest rate of SARON mortgages has climbed 1.68 percentage points, from 0.93 percent to 2.61 percent.  

The current average interest rate of 2.61 percent for SARON mortgages is based on 20 different SARON mortgages from different lenders. The actual interest rates vary between individual lenders, ranging between 2.27 and 2.86 percent. “Regardless of which interest scenario you expect, borrowers looking for a SARON mortgage can save money by comparing costs and choosing the cheapest lender.” In many cases, it is also possible to negotiate a lower markup for a SARON mortgage.

SARON mortgage or FRM?

While it is currently possible to find FRMs for certain mortgage terms that are cheaper than SARON mortgages, that does not mean that borrowers should generally prioritize FRMs. Whether an FRM or a SARON mortgage works out cheaper heavily depends on future interest rate developments.

Example: A five-year FRM currently costs 2.57 percent, on average. Using a SARON mortgage for five years at the current rate of 2.62 percent is currently more expensive. But if the SNB were to lower its key interest rate and not raise it again within the five-year period, then a SARON mortgage would still work out cheaper across the full mortgage term. The reason for this is that the interest rate of a SARON mortgage is adjusted periodically (typically every three months) in keeping with the SARON rate.

Good to know: From a historical perspective, SARON mortgages have usually been cheaper than fixed-rate mortgages.

Outlook

Sinking inflation rates in Switzerland and other countries indicate that tighter financial policies have made an impact. However, it is still too early to assume that the cycle of interest hikes is complete. “There are many inflation drivers that cannot be ruled out,” says Felix Oeschger from moneyland.ch.

In its financial policy evaluation released a month ago, the SNB indicated that it anticipates an inflation rate in excess of 2 percent in the coming year. The market currently assumes that inflation will remain high in the coming year, and possible beyond that, which leaves little room for interest rate reductions in the near future.

The narrow gap between the interest rates of two-year FRMs and SARON mortgages indicates that the interest rates of short-term FRMs are not likely to go down in any significant way. “If the market believed that we are on the cusp of a sustainable lowering of interest rate levels, then short-term FRMs would be cheaper than SARON mortgages, and not the same price,” explains Felix Oeschger.

Conclusion: It is unlikely that we will see major reductions in interest rates for Swiss mortgages in the coming months.

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