After months of rising costs, the mortgage rate market appears to be at a turning point. Here’s what prospective homeowners need to know now
By far the largest credit market in Switzerland is mortgages. The Swiss population has already borrowed nearly 1,000 billion francs to fulfill their dream of becoming homeowners. In the beginning of the year and up until June, long-term mortgages saw a significant increase, with the cost of a ten-year fixed-rate mortgage rising from under 1.4% to around 3%. Today, the market has once again shifted. What is happening concretely in the mortgage market? Here is a perspective in five points
1
Why are mortgage interest rates dropping again?
The prices of mortgages primarily depend on the cost at which banks can borrow money. Market interest rates, specifically the long-term interest rates of government bonds, determine these prices. ‘Swiss market interest rates are strongly linked to those in the United States, where concerns about a recession have recently emerged, leading to a decrease in rates,’ explains Stefan Meyner, Head of Research at MoneyPark, a mortgage specialist.
If investors fear that the economy is no longer growing, meaning it is entering a recession, this increases pressure on central banks to lower the price of money, i.e., the benchmark interest rate. Anticipating this, market interest rates are already decreasing, including in Switzerland. Following the decline in market interest rates, fixed-rate mortgage prices have once again fallen
2
Why and how will mortgage rates evolve in the future?
It depends on the durations. Variable-rate mortgages, which are linked to the Saron reference rate, are set to become more expensive. Indeed, the Swiss National Bank has already announced a new rate hike for September. ‘We expect the SNB to raise its policy rate from 0.75% to 1.25% over the next twelve months. Saron mortgages would then see their prices increase from 1.3 to 1.8%,’ explains MoneyPark expert Stefan Meyner. Compared to the current level, this would represent a doubling.
The situation is different for long-term interest rates and mortgage prices. Most experts anticipate that the peak of capital market interest rates has already been surpassed, precisely because economic prospects are dimming, particularly due to uncertainties related to the war in Ukraine and concerns about the consequences of China’s ‘zero-Covid’ policy.
‘Capital market interest rates are not rising much anymore as the economy is already cooling off, and significant central bank rate hikes beyond 2022 have become less likely due to deteriorating growth prospects,’ also note economists from Raiffeisen in a study.
3
Has the recent increase in interest rates slowed down real estate prices?
So far, no such trend has been observed. According to Raiffeisen’s study, detached houses continued to rise in the second quarter compared to the previous quarter, by 1.3%. Townhouse prices even increased by 3.5% between April and the end of June. ‘The price boom that has lasted for over twenty years continues relentlessly at an already high level and at a pace close to record values,’ write Raiffeisen experts. However, it is still too early to draw a definitive conclusion. It is entirely possible that real estate prices may ‘take a breather’ in the wake of high-interest rates
4
Have there been any other changes in the mortgage market?
Undoubtedly. ‘In contrast to the real estate purchase market, clear reactions to changes in interest rates are observed in the mortgage markets,’ write Raiffeisen experts. Thus, at the beginning of the year, over 75% of all new real estate loans were still fixed-rate mortgages. The situation has now reversed. ‘In June and July, for the first time, more short-term mortgages were concluded than fixed-rate mortgages,’ states the Raiffeisen study
5
What should real estate buyers do, then?
As we saw earlier, variable-rate mortgages are becoming more expensive due to the rise in policy rates. According to the prevailing opinion, long-term fixed-rate mortgages are expected to exhibit a sideways trend in interest rates. In other words, the price advantage of Saron mortgages is diminishing, while the cost of the security provided by a fixed-rate mortgage is decreasing.
“Choosing between a fixed or variable-rate mortgage depends on the appetite for risk and the individual situation of the contracting party,” explains Stefan Meyner. He suggests that new buyers consider a Saron mortgage for the next twelve months. “If it becomes more expensive after a year and long-term interest rates have not continued to rise as expected, it’s worth switching to a fixed-rate mortgage,” he suggests.
Adrian Wenger, mortgage expert at VZ Vermögenszentrum, an independent center for financial advice, proposes another option: clients should opt for a Saron mortgage. “However, they should calculate with an interest rate of 2%,” explains Adrian Wenger. “The difference between the effective credit interest rate and the calculated 2% interest rate should then be deposited monthly into a blocked account.”
The advantage of this maneuver: if short-term interest rates rise, the saved money provides a safety net. “If interest rates stay below 2%, clients can use the money to repay their loan,” explains Adrian Wenger.
Holger Alich is the deputy head of the economic section. His areas of expertise include banks and the pharmaceutical sector. He has previously worked as a correspondent in Paris and Zurich for the German newspaper “Handelsblatt.” Trained as an economist, he learned the journalism profession at the School of Journalism in Cologne, Germany.
