The Pros and Cons of Fixed-Rate Mortgages

Fixed-rate mortgages are, by far, the most popular mortgage model in Switzerland. 10-year fixed-rate mortgages are particularly widely used. Like all mortgage models, fixed-rate mortgages too have advantages and disadvantages. Here, moneyland.ch explains the pros and cons to help you understand when using a fixed-rate mortgage makes sense.

The pros and cons listed here apply primarily to fixed-rate mortgages with long terms. Both the advantages and disadvantages are less notable for fixed-rate mortgages with short terms.

Three advantages of fixed-rate mortgages

1. Cheap if interest rates climb: The interest rate of a fixed-rate mortgage remains the same for the whole mortgage term. It cannot get higher or lower. If market interest rates go up after you’ve signed your mortgage agreement, you benefit because your lower interest rate is locked in for the full term.
2. Easier to plan: Swiss fixed-rate mortgages normally have a contract term of between two and 10 years. But longer terms of up to 25 years are also found. Because your interest rate stays the same for the whole term, you can account for the exact cost of interest when creating your budget.
3. Less administration: The longer the mortgage term, the less time and effort you have to spend on managing your mortgage. When you use long mortgage terms of ten years or more, you can more or less relax during that period, insofar as your mortgage is concerned. You do not have to fuss with replacing or extending your mortgage every few years, as is often the case with a SARON mortgage.

Three disadvantages of fixed-rate mortgages

1. Expensive if interest rates sink: If market interest rates go down after you have gotten a fixed-rate mortgage, you will be stuck with your higher locked-in interest rate for the entire mortgage term, and cannot take advantage of the low market rates.
2. Terminating your mortgage early is expensive: Terminating a fixed-rate mortgage early – because of a divorce, for example – can be problematic. When you get a fixed-rate mortgage, you agree on a fixed interest rate that applies to the full mortgage term. That gives the lender leverage over you should you ever want to end your mortgage early. The bank normally charges an early termination penalty and administrative fees, and these can be very expensive.
3. No voluntary, extra mortgage repayments: No matter which kind of mortgage you use, Swiss second mortgages must be paid off within a maximum of 15 years. You are not required to pay off your first mortgage. Whether or not it is possible to pay off a fixed-rate mortgage depends on which lender you use, and the terms and conditions of your contract. With long-term fixed-rate mortgages in particular, having to wait until the end of the mortgage term to amortize your mortgage can be very limiting.

Fixed-rate mortgage or SARON mortgage: Which costs more?

Since the nineteen-nineties, LIBOR mortgages (the predecessors of SARON mortgages) have, on average, been notably cheaper than fixed-rate mortgages with mid-length and long mortgage terms.

Only at the end of 2023, when the Swiss National Bank increased its key interest rate for the fifth time in a row, did fixed-rate mortgages become cheaper than SARON mortgages again. The reason is that the high key interest rates drove up the interest rates of SARON mortgages, while fixed-rate mortgages had already begun to become cheaper on the expectation that the key interest rate would go down again.

That historical perspective speaks somewhat more in favor of SARON mortgages and against fixed-rate mortgages with mid-length and long terms. But it should be noted that the overall interest rate level as a whole has come down over the past 30 years, which worked in favor of SARON mortgage during that period.

A personal decision

In addition to the pros and cons listed above, whether or not using a fixed-rate mortgage makes sense also largely depends on your personal needs and your financial situation.

If, for example, there is a chance that you may sell your property in the foreseeable future, you should generally avoid choosing a fixed-rate mortgage with a long mortgage term.

Often, choosing the right lender and negotiating a good interest rate is more important than which mortgage model you use.

More on this topic:
Tips for choosing the right mortgage
How to terminate a mortgage ahead of schedule
SARON mortgages explained
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