Fixed-Rate Mortgages Reach a New Low

The interest rates of Swiss fixed-rate mortgages (FRMs) have been sinking since the middle of July 2023. The downward trend has accelerated since September, when the Swiss National Bank (SNB) went against market expectations by not raising its key interest rate.

Current interest rates for fixed-rate mortgages

In mid-June 2023, the average cost of fixed-rate mortgages was 3.07 percent per annum for two-year FRMs, 3.02 percent for five-year FRMs, and 3.04 percent for 10-year FRMs. Currently, average interest rates are 2.26 percent for two-year FRMs, 2.19 percent for five-year FRMs, and 2.31 percent for 10-year FRMs.

That means the average rates have gone down by 0.81 percentage points (two-year FRMs), 0.83 percentage points (five-year FRMs), and 0.73 percentage points (10-year FRMs) within the past approximately six months. “That is a notable decrease in mortgage interest rates, for such a short period,” observes moneyland.ch analyst Felix Oeschger.

Fixed-rate mortgages are now cheaper than SARON mortgages

At the end of October 2023, moneyland.ch reported that for the first time in the recent past, SARON mortgages were no longer cheaper than fixed-rate mortgages. At the time of the report, the cost of SARON mortgages was similar to that of FRMs.

That trend has sharpened since then. Currently, the moneyland.ch Swiss Mortgage Index shows that fixed-rate mortgages are significantly cheaper than SARON mortgages for all mortgage terms. The average annual interest rate for SARON mortgages has remained unchanged at 2.61 percent since the end of October, while the interest rates of FRMs have gone down substantially.

According to the moneyland.ch Swiss Mortgage Index, two-year FRMs are currently 0.35 percentage points cheaper than SARON mortgages. Five-year FRMs are 0.42 percentage points cheaper, and 10-year FRMs are 0.30 percentage points cheaper. “But one should not conclude that FRMs are, by default, the better choice,” says Oeschger. The reason is that the interest rate of an FRM granted today will remain the same for the entire mortgage term, while the interest rate of a SARON mortgage may go down over the coming years.

Outlook

Since the SNB’s last financial policy announcement, the market has adopted the belief that interest rates have reached their pinnacle. The majority of market observers assume that the SNB will leave its key interest change unchanged at its next financial policy announcement on Thursday, and then again in the first quarter of 2024, and will only lower its key interest rate in mid-2024.  

But there are many uncertainties. If the economy contradicts expectations and weakens substantially, the SNB may be forced to lower its key interest rate sooner than expected. On the other hand, further inflation drivers, which would force a tightening of financial policies and push mortgage interest rates upward, cannot be completely ruled out.

In addition to economic developments and inflation, Swiss financial policy is also influenced by the policies of foreign central banks, and particularly the US Federal Reserve system. If the SNB were to significantly lower its interest rate before other central banks do, that could burden the Swiss franc and drive inflation in Switzerland. “That would limit the SNB’s maneuvering space. I expect that the SNB will hold off on lowering its key interest rate until other central banks lower theirs,” says Oeschger.