The interest rate of a LIBOR-based mortgage (also known as a «money market» or «rollover» mortgage) is adjustable and follows the London-based interbank rate known as the London Interbank Offered Rate, or LIBOR.
LIBOR-based mortgage rates vary depending on the issuing bank. The LIBOR mortgage types most commonly offered by Swiss lenders are those based on the 3-month LIBOR and 6-month LIBOR. By comparison, mortgages based on the 1-month LIBOR and 12-month LIBOR are relatively rare.
What types of property do LIBOR-based mortgages cater to?
A whole lineup of Swiss banks offer LIBOR-based mortgages. In contrast, only a few insurance companies offer them. The Swiss Life money market mortgages are an example of these.
In addition to mortgages for primary residences, many banks also offer money market mortgages for secondary residences, holiday homes, investment property and commercial property. In the mortgage comparison you will automatically see LIBOR-based mortgages that match your criteria.
How much does a LIBOR mortgage cost?
A LIBOR-based mortgage is made up of the selected LIBOR rate plus a markup added by the lender. Interest rates for secondary mortgages are normally higher (0.5 percentage points higher than primary mortgages, for example).
If the LIBOR goes into the negative, which is generally the case in a negative interest environment, Swiss banks revert to a 0% annual interest rate rather than adapting the LIBOR-based mortgage to follow negative LIBOR rates.
Because of this, the rates you get on LIBOR mortgages in today’s negative interest environment are made up entirely of the margin added by the bank. Rates typically fluctuate between 0.5% up to a maximum of 1.5% annually.
Some banks use individual customer profiles to determine the markup they add to the LIBOR. Being ready to bargain with banks is beneficial. Depending on the bank, you may also be able to get rate reductions specific to energy-efficient housing or to family homes.
The costs attached to LIBOR-based mortgages do not vary as widely between lenders as those of fixed rate mortgages. Still, you can save thousands of francs per year by carefully choosing the right LIBOR mortgage. A cost comparison is definitely worth your time.
What mortgage terms are available?
LIBOR-based mortgages generally come with terms of between 1 and 6 years. The most widely used are contracts with a tenure of 3 years, though loans with 10 year terms are also offered. Banks like UBS or PostFinance only offer 3-year contracts.
Whenever possible, it makes sense to get short-term mortgage contracts. Doing so sets you free to switch to other mortgage offers without being tied into a long-term contract or having to pay early-termination penalties.
What is the minimum loan amount for a LIBOR-based mortgage?
As a rule, lenders only provide LIBOR mortgages for property loans above a clearly defined floor. The minimum loan varies between lenders, but often sits at 100,000 or even 200,000 francs. The mortgage comparison tool from moneyland.ch automatically filters out mortgages that don’t match the amount you enter.
Only a select few lenders place a cap on the maximum loan you can obtain through a LIBOR-based mortgage. Requirements for loan-to-value ratios and expense-to-income ratios generally follow the same rules which apply to fixed rate mortgages.
When is a LIBOR-based mortgage the best choice?
In principle, getting a LIBOR-based mortgage pays off most when the LIBOR, or money market rate, is low. When that’s the case, you can steadily profit from the low rates. When the LIBOR increases over a long period, you will probably be better off with a fixed rate mortgage.
So whether or not a LIBOR mortgage will save you money depends on what interest rates look like in the future. The obvious problem: Nobody can really say what direction interest rates will take. However, a number of Swiss institutes make regular rate predictions which can help to point you in the right direction.
Rising interest rates: how to protect yourself
The longer the mortgage term of your LIBOR-based home loan, the higher the risk of interest rates changing for the worse. Swiss banks offer optional coverage for LIBOR mortgages, which help to protect your mortgage and your money should interest rates change. You can take advantage of these options to place a cap on the interest rate, meaning you won’t get a rate higher than the maximum agreed on. But this protection doesn’t come free, and you can expect to pay a markup on your mortgage if you opt for this benefit.
Many mortgage agreements also provide for the option of switching to a fixed rate mortgage, though you will generally be limited to offers from the same lender.
Make sure that a LIBOR-based mortgage contract allows for a switch before you sign on the dotted line.
Advantages of LIBOR-based mortgages:
- When interest rates sink for extended periods of time, you profit from the falling LIBOR because your mortgage rate will adjust based on the LIBOR rate. In most cases this adjustment takes place either every 6 months or every quarter. This makes LIBOR-based mortgages more flexible than fixed rate mortgages.
- A LIBOR mortgage can also provide a cost-effective alternative to fixed rate mortgages when interest rates remain constant.
- Over the past 20 years, LIBOR-based mortgages have, on average, remained more cost effective than fixed rate mortgages. However, that is no guarantee that they will remain the cheaper option in the future.
Downsides of LIBOR mortgages:
- Vulnerability to rate changes: In the case of a radical hike in interest rates, LIBOR mortgages can very quickly become expensive. When rates go up, fixed rate mortgages are safer because the rate you get doesn’t change. To minimize risk, many Swiss homeowners use a combination of LIBOR-based and fixed rate mortgages.
- Unlike variable mortgages, withdrawing from a LIBOR mortgage contract involves heavy penalties (as with fixed rate mortgages). Be sure to read the fine print.
- Relatively short mortgage terms and changing interest rates make it impossible to calculate the exact cost of your mortgage in advance. The total cost of a fixed rate mortgage, on the other hand, can easily be calculated before you commit.