Bond yields and Swiss mortgage interest rates spiked significantly at the start of the coronavirus crisis. Since then, capital markets have begun to recover. The interest rates of Swiss fixed rate mortgages (FRMs) have been sinking again over the past one-and-a-half months.
The history: climbing interest rates in March
When the Coronavirus crisis first hit Switzerland at the beginning of March 2020, the average interest rates were 0.93% for 5-year FRMs and 1.02% for 10-year FRMs – very near the historical lows which we saw in August 2019.
But mortgage interest rates spiked sharply over March 2020. The average interest rate for 5-year FRMs climbed from 0.93% to 1.03%. The average interest rate of 10-year FRMs climbed from 1.02% to 1.26% over March 2020 – a 20% price increase.
Mortgage rates sinking since the end of March
But rates have taken a turn since the end of March 2020, with mortgage interest rates sinking across the board, states moneyland.ch CEO Benjamin Manz. Since the end of March 2020, the average interest rate of 5-year FRMs slid from 1.03% to 0.98%. The average interest rate for 10-year FRMs dropped from 1.26% to 1.11% by May 18, 2020. The drop reverses around half of the increase we saw over March 2020.
Stock markets recovering
Stock and bond markets have made notable recoveries since their collapse in February and March 2020. The Swiss Market Index (SMI), for example, has recovered around 25% of its value since mid-March. Though initially slow to respond to the stock market recovery, mortgage interest rates have since begun to sink again.
Marginal price markups for long-term mortgages
The interest rate curve for Swiss FRMs has levelled out significantly since the end of March 2020. On March 26, 2020, the average price difference between 2 year FRMs and 10 year FRMs was 0.29 percentage points. In the meantime, that difference has declined to 0.14 percentage points. The average mortgage interest rate for 10 year FRMs now sits at 1.11%, not much higher than the current 0.97% for 2 year FRMs.
The difference in interest rates between short-term and long-term mortgages has radically decreased again since the end of March. In other words, the cost of long-term mortgages is only marginally higher than the cost of short-term mortgages. The market currently expects interest rates to remain low over the longer term. “Now is a good time for risk-averse mortgagors to consider long-term FRMs, as the price markup over short-term FRMs is very small,” observes moneyland.ch analyst Felix Oeschger.
Future developments of mortgage rates
There is no sure way to predict how mortgage interest rates will develop over the coming months and years. There is no way to predict the length and depth of the current recession in Switzerland or in other countries. Realistic developments could include a deflation or an inflation. “It is very possible that mortgage interest rates will continue to fall and even reach new historical lows,” says Felix Oeschger. But depending on market developments, the chance of the exact opposite happening – with interest rates climbing over the mid- to short-term – cannot be ruled out.
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