What should you do against rising rates? 3 action areas

What exactly is a forward mortgage?

With a forward mortgage you take out a fixed-rate mortgage in advance that you do not need until a later time, allowing you to secure the current rate of interest. You will often pay a forward surcharge for this peace of mind. A forward mortgage can be described as a fixed-rate mortgage with an insurance premium for the amount of interest. The interest rate can often be fixed up to 12 months in advance, sometimes even up to 18, 24 or 36 months in advance.

How is the forward surcharge calculated?

The forward surcharge is usually incorporated into the mortgage interest rate and is therefore spread across the full term of the mortgage. One-time premiums also exist but they are an exception.

The surcharge on a forward mortgage usually depends on how far in advance it is fixed: the shorter the period, the lower the surcharge. At UBS, the conditions are simple, clear and beneficial: the interest rate can be fixed up to 12 months in advance.

When is a forward mortgage worthwhile?

Whether a forward mortgage makes mathematical sense can only be answered with hindsight, because within the time frame in question the interest rate of a fixed-rate mortgage must rise to such an extent as to be higher than the interest rate of the forward mortgage plus the forward premium. A forward mortgage can also make sense when interest rates stay the same or even fall slightly: Owners looking for peace of mind are sometimes glad to know the interest rate from the start, with no risk of unpleasant surprises.

Calculation example: If the interest rate for a fixed-rate mortgage with a term of 10 years is currently 2.35 percent and the forward premium for a one-year advance is 0.15 percent, the interest rate on the fixed-rate mortgage must rise to at least 2.5 percent in the 12 months of the lead time for the forward mortgage to be worthwhile.

Answers to the question of whether a forward mortgage makes financial sense assume that you know the precise date from which you need the mortgage. When you renew a mortgage, you know the date right from the start. However, the date will not always be set in stone if you are buying a home and looking for your first-ever mortgage. In the event of delays, this can mean that the mortgage is disbursed before you actually need the money.

When interest rates rise, homeowners’ initial instinct is often to find a solution as quickly as possible in order to benefit from favorable interest rates for as long as possible while they still can. At first glance, a money market mortgage does not seem appropriate. However, studies have shown that in the longer term, money market mortgages are cheaper than fixed mortgages, even when interest rates are rising.

In a normal interest rate environment, money market rates are lower than interest rates for longer-term financing, but they can also change relatively quickly. This makes the UBS SARON Mortgage particularly suitable for people who follow events on the money and capital markets and are able and willing to cope with the financial consequences of interest rate fluctuations.

It is therefore advisable to divide a mortgage into several tranches with different terms. Depending on the financing strategy, it can make sense to include SARON mortgages. This is a good way of protecting yourself against the risk of rising interest rates over a long period. It’s good to know that UBS SARON Mortgages can be converted into fixed-rate mortgages at any time.

As you can see, there is no single correct or suitable strategy, only one that is right for you based on your personal need for peace of mind and how motivated you are to monitor interest developments. That is why it’s worth getting professional advice from UBS. We’ll look at the situation from every possible angle and propose a strategy that’s right for you.