Swiss mortgages use one of 2 methods to calculate interest rates: national and international day-count conventions.
The Swiss national day-count convention simply multiplies the mortgage debt by the interest rate every year.
In contrast, the «international» day-count convention uses a more complicated formula, in which the annual interest rate is multiplied by the number of days in each calendar year. The result is then divided by 360 to produce the annual interest rate. You will pay more interest on a mortgage that uses the international day-count convention compared to a mortgage which follows the Swiss day-count convention.
Day-count convention: example
This example uses a calculation of interest charges over the full term of a 10-year fixed rate mortgage of 800,000 francs with an interest rate of 1.5%:
Swiss day-count convention
Annual interest charges: 800,000 francs * 1.5% = 12,000 francs
Interest charges over a 10-year term: 10 * 12,000 francs = 120,000 francs
International day-count convention
Interest charges on a leap-year: 800,000 * 1,5% * 366 / 360 = 12,200 francs
Interest charges in a regular year: 800,000 * 1.5% * 365 / 360 = 12’166.70 francs.
Interest charges over a 10-year term: 3 * 12,200 francs + 7 * 12,166.70 = 121,766.90 francs (accounting for 3 leap years).
Over a 10-year mortgage term, the international day-count convention costs the borrower more. In this case 1766.90 francs (121,766.90 francs - 120,000 francs) more than the same mortgage would if it used the Swiss day-count convention.
The Swiss day-count convention is used in most fixed rate and variable mortgages issued in Switzerland. LIBOR-based mortgages, on the other hand, normally calculate interest using the international day-count convention.
Interest rates of fixed rate mortgages are calculated based on annual interest. This annual interest rate is then divided and paid in several installments (on a quarterly basis, for example).