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Mortgage comparison
SARON or fixed-rate mortgage: which is currently best?
Discover the main differences between the two types of mortgage and make the right decision.
Content:
Content:
- SARON or fixed-rate mortgage: what are the main differences?
- How are the interest rates structured?
- SARON and fixed-rate mortgages: who are they suitable for and why?
- To the conclusion
Whether a fixed-rate mortgage or a SARON mortgage is more worthwhile for you depends on the market environment – but not only that. Find out which factors you should consider when choosing a mortgage.
There are several differences between a SARON mortgage, also known as a money market mortgage, and a fixed-rate mortgage. The first is the mortgage interest rate, and the second is the term. Both will have an impact on the borrower’s finances.
SARON mortgage | SARON mortgage | Fixed-rate mortgage | Fixed-rate mortgage |
|---|---|---|---|
SARON mortgage | The term is often unlimited or, if not, between one and a maximum of five years. | Fixed-rate mortgage | Fixed term, usually between one and ten years, determined jointly by the borrower and the lender. |
SARON mortgage | Interest rates are set quarterly in line with fluctuations in the SARON rate (Swiss Average Rate Over Night). | Fixed-rate mortgage | The interest rate is fixed when the contract is signed and cannot be changed during the term. |
SARON mortgage | The flexible interest rate is an advantage for borrowers when interest rates fall. However, if interest rates rise, the interest costs will also go up. In the long term, a SARON mortgage usually turns out to be more economical than a fixed-rate mortgage. | Fixed-rate mortgage | The mortgage holder benefits from long-term planning security, as the mortgage interest rate of a fixed-rate mortgage does not change. |
SARON mortgage | Holders of a SARON mortgage with an unlimited term can switch mortgage model at any time subject to the notice period. | Fixed-rate mortgage | If the mortgage is repaid or replaced before the term, a high early repayment penalty may be due depending on the remaining term and the mortgage interest rate. |
SARON mortgage | The mortgage loan can generally be amortized. | Fixed-rate mortgage | Amortization is not possible unless agreed before signing the contract. Amortization is only possible at the end of the term. |
Which is more economical in the long term, a SARON mortgage or a fixed-rate mortgage?
Which is more economical in the long term, a SARON mortgage or a fixed-rate mortgage?
According to experience, SARON mortgages have often been shown to be a more favorable alternative to fixed-rate mortgages over a longer time horizon, with a benefit of 15 to 20 percent of the cumulative interest payments. This ultimately depends on the real conditions on the interest rate market, as explained below.
According to UBS forecasts, a SARON mortgage is likely to be the more favorable financing option over a ten-year term compared to a ten-year fixed-rate mortgage. We estimate the interest cost advantage of the SARON mortgage to be just under a fifth of the cumulative interest payments of a ten-year fixed-rate mortgage over the entire term.
If, contrary to our forecasts, higher short-term interest rates materialize in line with current market expectations, the cost advantage of a SARON mortgage will no doubt shrink to around 5 percent.
If short-term interest rates were to rise persistently due to serious concerns about inflation, a fixed-rate mortgage would be the more advantageous option over a ten-year term.
The most favorable financing depends on inflation expectations
The most favorable financing depends on inflation expectations
Estimated interest costs of a ten-year fixed-rate mortgage and SARON mortgages for various scenarios with a loan-to-value of CHF 1 million, cumulated over ten years, in thousands of francs.
Can I switch from one type of mortgage to another during the term?
Can I switch from one type of mortgage to another during the term?
In principle, you can switch to a fixed-rate mortgage at any time if you have a SARON mortgage with an unlimited term, such as the UBS SARON Flex Mortgage, subject to the notice period. This can be very worthwhile during periods of low interest rates, as a fixed-rate mortgage allows you to benefit from low interest rates for longer.
The situation is different if you have a fixed-rate mortgage. Although it can be repaid early, the bank will demand an early repayment penalty. The fee due will depend on the remaining term and the mortgage interest rate. If you repay your mortgage, the bank will have to invest the money on the financial market instead, where it will generally obtain lower interest rates and therefore lower profits. The bank will charge you the difference, added up over the remaining term.
The choice of the best mortgage financing depends on individual factors. The first question to answer is what type of person you are. The more security conscious the borrower, the more advisable a fixed-rate mortgage with a long term.
There are also good reasons for opting for a SARON mortgage. Choosing a short term allows you to remain flexible. If you are suddenly tempted by a job offer abroad or if there is a change in your family situation (divorce, children moving out, etc.), you can sell your home in the short term without incurring an early repayment penalty.
In addition, mortgage borrowers are free to take action regularly if interest rates change and can switch to a fixed-rate mortgage if necessary. But to benefit, they must keep up to date with market conditions. This is something that requires a certain amount of interest and expertise.
What’s next for mortgage interest rates?
What’s next for mortgage interest rates?
Our interest rate forecast gives you information each month on current interest rates and interest rate trends – free of charge by email.
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Are there differences in the flexibility of repayments?
The various mortgage models differ significantly in terms of the flexibility of repayments, i.e. amortization. The following overview will make things clearer.
SARON mortgage | SARON mortgage | Regular amortization is generally possible, but must be agreed in advance in the mortgage contract. | ||
|---|---|---|---|---|
Fixed-rate mortgage | Fixed-rate mortgage | If it is your first mortgage, it does not have to be amortized. However, it can be fully or partially amortized at the end of the term. Anyone wishing to amortize part of their first mortgage during the term of the loan must pay an early repayment penalty unless the amortization was agreed when the contract was initially concluded. | ||
Fixed-rate mortgage with tranches | Fixed-rate mortgage with tranches | Taking out a fixed-rate mortgage with several tranches is a good way to schedule amortization. Borrowers usually opt for two or three tranches. The amount of each tranche corresponds to the amount they wish to amortize. |
How can I protect myself against rising interest rates?
There are several ways to minimize the interest rate risk on mortgages so that you can take action if interest rates rise. Strategies differ depending on the mortgage model. However, it is vital to keep an eye on the interest rate market, to follow the latest trends and to show a certain interest in the financial market.
- If interest rates are low, you can convert a SARON mortgage into a fixed-rate mortgage with a longer term to lock in the low interest rates in the long term. You can split a fixed-rate mortgage to cushion the risk of having to extend the entire mortgage when interest rates are high. However, this means that you can only renew a partial amount at favorable conditions if interest rates are very low.
- You can also decide on a mortgage mix. For example, you can take out a fixed-rate mortgage and a SARON mortgage. This protects part of the total mortgage amount against rising interest rates. Conversely, you will not benefit fully from falling interest rates as you would with a SARON mortgage.
- You can lock in a favorable interest rate with a forward or term mortgage. In principle, this means taking out the mortgage while interest rates are favorable before you actually need it. The mortgage term will not start until a later date. You can choose lead times of up to 12 months, or occasionally even longer. You often pay a forward premium for this benefit. The amount of the surcharge usually depends on the duration of the lead time.
It cannot be said with certainty whether a SARON mortgage over a term of ten years is still the more favorable financing option compared to a ten-year fixed-rate mortgage despite the current inverted yield curve. The extent of a possible cost advantage is largely dependent on inflation trends. Mortgage costs are an important factor when deciding which mortgage model is right for you – but your personal preferences and financial situation should also play a role in the decision. That’s why it pays to seek professional advice from UBS. We will make sure that you consider all the important points and determine a strategy that suits you.
Disclaimer
Disclaimer
