What types of mortgages are there?

When taking out a mortgage, you can choose between a fixed-rate and a SARON money market mortgage. The main differences between types of mortgage are in the ability they give you to plan ahead. This relates to the possibility of fixing the interest rates and term: in the case of a fixed-rate mortgage, these are both fixed, whereas with a SARON mortgage they are flexible. To benefit from the advantages of both types of mortgages, we recommend combining different mortgage products and terms whenever possible. This minimizes the risk of having to renew the entire mortgage all at once in the event of unfavorable changes in the interest rate.

A fixed-rate mortgage is a suitable solution if you want to plan your costs in the long term. It offers you stability, since the interest rate and therefore the costs remain the same throughout the entire term. This means you are protected against rising interest rates during the term of the mortgage. In addition, the fixed-rate mortgage has a fixed term, so you can reconsider your financing at the end of each term. The term is from 2 to 10 years: the longer the term, the higher the interest rate.

The interest rate for money market mortgages is based on the Swiss benchmark interest rate SARON. The abbreviation stands for “Swiss Average Rate Over Night.” This is the average interest rate at which commercial banks lend money to each other. It closely follows the official key interest rate set by the Swiss National Bank.

The SARON mortgage is ideal if you want to finance your home without a fixed term, based on a flexible interest rate. The interest rate adjusts to the market level transparently every three months and is therefore highly variable. This variability will be welcome when interest rates fall, but not when they rise. If the situation changes over time and you expect interest rates to rise, you can switch to a fixed-rate mortgage within a few working days. If you want to repay the mortgage, you can do so after a notice period of 13 months.

The SARON Flex Mortgage offers you even more flexibility for a fee: a shorter notice period of just one month and the possibility of reducing your mortgage once a quarter free of charge.

How interest rates in Switzerland will develop over the next 10 years depends on economic growth, inflation, monetary policy and the exchange rate. No one can predict exactly how they will develop. However, it is possible to monitor the factors and players that influence interest rates. On this basis, UBS regularly publishes interest rate forecasts and analyses of the expected developments on the mortgage market, which you can subscribe to free of charge.

The Swiss National Bank has an important influence on interest rates. For example, if inflation is expected, it will probably increase interest rates. It also considers the exchange rate of the Swiss franc when setting its monetary policy. If the national currency appreciates sharply against foreign currencies, this slows down inflation, but also economic growth.

Fixed-rate or flexible: the type of mortgage that is best for you depends on individual factors, such as your personal risk tolerance, your long-term plans and financial leeway.

High or low risk? This is one of the questions you must answer if you’re interested in taking out a mortgage. How much risk are you prepared to take? The more security-oriented you are, the more likely it is that a long-term fixed-rate mortgage is the right choice.

How much flexibility? The answer may differ depending on your life and career plans. Are you planning to live in your own home in the long term, or are you considering a job offer abroad in the medium term? With a money market mortgage or a mortgage with a short term, you remain flexible even if your family situation changes, for example, due to divorce or the children moving out.

Before deciding, it is advisable to take a deep look into your financial reserves and ask yourself: with a market-oriented mortgage, would you be able to maintain your standard of living even if interest rates rise? And are you prepared to monitor the mortgage market in the long term and inform yourself about the current conditions?

If you wish, we would be happy to advise you so that you can find an optimal financing strategy.

How to best combine mortgages

In many cases it makes sense to combine multiple smaller mortgages rather than taking on one large one. This allows you to reduce the interest rate risk or to spread it out better. Otherwise, it could be that at the end of the term the interest rate level is higher than the interest paid so far, and you are faced with the problem of renewing the entire mortgage at a higher interest rate. If you divide the mortgage into several tranches with different maturities, you can avoid this.

With “tranching,” the entire mortgage amount is divided into several tranches of different types of mortgages with different terms. This is often a mix of fixed-term and SARON mortgages. You decide the size of each tranche, whether 50:50 or 20:80.

The question “fixed-rate or variable-rate mortgage?” can usually be answered as follows: both! A combination of the most popular mortgages, the fixed-rate mortgage and the SARON mortgage, gives you the opportunity to finance your property securely and at the same time reduce the interest rate risk.