saron mortgage switzerland questions answers guide
Loans & Mortgages

SARON Mortgage Questions and Answers

August 27, 2021 - Benjamin Manz

Get answers to your questions about SARON mortgages in Switzerland from this moneyland.ch guide.

What is a SARON mortgage?

The SARON mortgage is the new Swiss money market mortgage. In Switzerland, SARON mortgages are replacing the LIBOR mortgage model.

Unlike fixed-rate mortgages, the interest rates of SARON mortgages are not fixed across the full mortgage term. Instead, interest rates follow the SARON reference rate, which can change on a daily basis.

The interest rate of a SARON mortgage is made up of the SARON rate plus a markup added by the lender. If the SARON rate is negative (as has been the case for some time now), the mortgage interest rate is made up of the markup only.

Which lenders offer SARON mortgages?

SARON mortgages are primarily offered by banks. Most banks which offer fixed-rate mortgages also offer SARON mortgages (or will introduce these shortly). Pension funds generally do not offer SARON mortgages.

The mortgage comparison on moneyland.ch includes SARON mortgage offers from all major Swiss banks.

Are there any fully-online SARON mortgage offers?

Yes. A number of Swiss lenders offer SARON mortgages which can be applied for fully online. These are included in the mortgage comparison on moneyland.ch.

Which types of property can SARON mortgages be used for?

SARON mortgages are generally available for all types of real estate. This means you can find SARON mortgages for your primary residence, a secondary residence, holiday homes, investment properties and commercial properties.

Whether you can finance a property purchase and under which conditions depends strongly on the lender in question, and your creditworthiness. As with other types of mortgages, all mortgage lenders accept mortgages of primary residences. But more specialized mortgages like those for commercial property and investment property are only possible with some lenders.

When does getting a SARON mortgage make financial sense?

When money market rates sink or stagnate, SARON mortgages are generally cheaper than fixed-rate mortgages with long terms.

But in every case, SARON mortgages are more flexible than long-term mortgages. This can, for example, make them a good choice for mortgagors who are considering selling their property within several years. Many lenders also give you the option of converting a SARON mortgage to a fixed-rate mortgage from the same lender free of charge. SARON mortgages are also significantly cheaper than Swiss adjustable-rate mortgages.

How much do SARON mortgage cost?

The cost of a SARON mortgage is made up of the compounded SARON interest rate plus the lender’s markup.

In the current negative-interest environment, the compounded SARON rate is negative. When the SARON rate is negative, lenders simply use 0% as the base rate onto which they add their markup. In this case, the mortgage interest rate is equal to the lender’s markup.

Currently, SARON mortgage interest rates are identical to the lender markups, and vary between around 0.5% and 1.25%.

The markup normally remains unchanged throughout the full term of the SARON mortgage agreement (typically between 3 and 5 years).

Can I terminate a SARON mortgage ahead of schedule?

Yes. But as with fixed-rate mortgages, most lenders charge a penalty fee and often an administrative fee as well. Penalty fees for premature terminations vary between lenders.

Do any other fees apply to SARON mortgages?

As with fixed-rate mortgages, there are other costs which may apply to SARON mortgages in addition to interest and penalty fees. These may include fees for term extensions, loan alterations, the issuing of the mortgage agreement, the refinancing of your mortgage with a third-party mortgage, and converting your mortgage to a different mortgage model. In many cases, these incidental costs can add up to hundreds of francs, depending on the lender.

Which are the cheapest SARON mortgages?

The mortgage comparison on moneyland.ch makes it easy to find the cheapest SARON mortgage based on current advertised guide rates. In many cases, the cheapest offers are mortgages with fully-online application processes.

Are the interest rates of SARON mortgages negotiable?

The rule with regards to Swiss mortgages is: always negotiate when possible. Room for negotiation varies between lenders. While the interest rates of online mortgages are often not negotiable, you can generally negotiate the rates of conventional mortgages and save thousands of Swiss francs every year.

How frequently is interest charged?

Normally the billing period for interest is identical to the interest term. In many cases this is 3 months. This means interest is normally charged every quarter – or four times per year. But there are other interest billing variations which defer from this rule.

How is the SARON different to the LIBOR?

The SARON is calculated based on actual completed transactions. It is linked to the secured money market (on which banks lend each other money collateralized by securities like equities and bonds).

The LIBOR is primarily based on nothing but recommendations from a relatively small number of banks, and is linked to the unsecured money market. For these reasons, the SARON is considered to be less vulnerable to manipulation and more resilient to crises than the LIBOR.

What is the difference between a SARON mortgage and a LIBOR mortgage?

The LIBOR mortgage was the predecessor of the SARON mortgage. Both types of mortgages work in a very similar way. Both are money market mortgages. What this means is that if a LIBOR mortgage was the most favorable option for you up until now, a SARON mortgage would be the right solution for you now.  

The most important differences are:

  • A SARON mortgage is linked to the new Swiss SARON reference index, and not the LIBOR.
  • Different calculation used: With LIBOR mortgages, the interest rate is set at the start of the interest term. With SARON mortgages, that is not the case with most calculation methods. Instead, the interest rate is determined at the end of the interest term. This difference is negligible for you as a mortgagor.
  • The interest rates of SARON mortgages can differ slightly from those of the LIBOR mortgages that they replace.

What is the difference between a SARON mortgage and a fixed-rate mortgage?

  • With fixed-rate mortgages, you select a specific term over which the mortgage will run (typically between 1 and 20 years). You are given a fixed interest rate which remains the same over the full term. With SARON mortgages, the interest rate is regularly adjusted in keeping with fluctuations in the SARON rate. 
  • The interest rates of SARON mortgages are typically higher than the interest rates of fixed-rate mortgages with very short terms (2 or 3 years). Banks cite the administration required for SARON mortgages due to ongoing calculations of the compounded SARON as the reason for this. 
  • SARON mortgages are more flexible than long-term fixed-rate mortgages and are easier to terminate and modify.

Can I convert an existing SARON mortgage into a fixed-rate mortgage?

Yes, this is normally possible. The term of the fixed-rate mortgage must be at least as long as the remaining portion of the SARON mortgage term. Many lenders do not charge fees for the conversion. However, with some lenders administrative fees or other costs may apply.

How are the interest rates of SARON mortgages calculated?

The interest rate you get with a SARON mortgage are made up of a base rate (the so-called compounded SARON) plus a markup added by the lender. Because the compounded SARON can be a negative rate, lenders use zero as a floor above which they add their markup. This means that when the SARON is negative, the interest rate is composed entirely of the lender’s markup.

Unfortunately, the general calculation of the compounded SARON is somewhat complex. But to put you at ease, the differences are generally irrelevant to you as a mortgagor. This is especially true under the current negative interest environment. You do not have to concern yourself with the details of how the compounded SARON is calculated. 

According to the Swiss National Bank, there are 7 different calculation variants. Lenders can choose which of these variants they want to use.

Most Swiss banks have chosen to use the Lookback variant. In this variant, the interest rate is determined at the end of the observation period and calculated several days later at the close of the interest period.

Some banks like the Appenzeller Kantonalbank, Credit Suisse and WIR Bank use the Last Reset variant. In this variant, the interest rate is determined at the start of the interest period (as with LIBOR mortgages).

Some banks use the Plain variant. In this variant, the interest rate is calculated and billed at the end of the interest period.

The variants used are clearly shown on the information pages of all SARON mortgages included in the mortgage comparison on moneyland.ch.

How long are the interest terms?

Most Swiss lenders use 3-month interest terms for SARON mortgages. Some lenders calculate interest every month. The observation periods (over which daily SARON rates are recorded for the calculation of the compounded SARON) can be longer or shorter than the interest term, depending on the variant used. The exact way in which the interest term is defined is not directly relevant for you as the mortgagor.

Which mortgage terms can you choose from?

Although the SARON interest rate changes constantly, most banks require you to subscribe to SARON mortgages for a minimum of one year.

The interest rate can change every interest term (every 3 months, for example), but the markup remains the same throughout the full mortgage term.

As a rule, Swiss SARON mortgages are offered with mortgage terms of between 1 and 5 years. Mortgage terms of between 3 and 5 years are the most common.

Some lenders also offer SARON mortgages with unlimited loan terms. These SARON mortgages do not have predefined mortgage terms, so they are more flexible with regards to termination. SARON mortgages without loan terms can normally be suspended within less than one year without your being charged early-termination penalty fees. 

Markups (and the resulting interest rates) can vary depending on the mortgage term, as you can see in the mortgage comparison on moneyland.ch.

Typically, either the markup is identical for all available mortgage terms, or lenders use lower markups for mortgages with longer terms. But there are deviations from this rule depending on the lender and SARON mortgage.

Can I amortize a SARON mortgage?

In most cases, both direct and indirect amortization of secondary mortgages are possible. But exceptions are possible. Depending on the lender and the mortgage agreement, it may also be possible to amortize a primary mortgage.

Is there a minimum mortgage size for SARON mortgages?

Yes. The minimum loan can vary between lenders. In many cases, the mortgage must be at least 100,000 francs, but some banks accept mortgages of 50,000 or even 25,000 francs. There are also banks which do not have set minimum mortgage sizes. 

Is there a maximum mortgage size for SARON mortgages?

Lenders do not normally have fixed limits on the amount you can borrow. The limit is largely determined by your individual creditworthiness and the property in question. The deciding factor is whether or not you meet affordability requirements. 

What are the advantages of SARON mortgages?

  • Unlike fixed-rate mortgages, the interest rate is not fixed for the full mortgage term. This is an advantage when the SARON rate drops, because your interest rate is lowered to match. 
  • Many banks give you the option of converting your SARON mortgage to a fixed-rate mortgage during the mortgage term.
  • SARON mortgages with short mortgage terms are more flexible with regards to terminating or migrating to a different mortgage.

What are the disadvantages of SARON mortgages?

  • The risk of interest rates changing: If the money market heats up and rates climb, SARON mortgages can become more expensive than fixed-rate mortgages.
  • Budgeting in advance is difficult with SARON mortgages (with their changing interest rates) than with fixed-rate mortgages.

Can I hedge against the risk of interest rates climbing?

There is no way to know for certain whether interest rates will go up again and when. If money market interest rates go up in the future, then having a fixed-rate mortgage with a fixed low interest rate can work out cheaper. With a fixed-term mortgage, your rate is fixed for the full term. With SARON mortgages, the interest rate goes up if money market rates go up. But you may be able to negotiate a cap on your SARON mortgage interest rate with your lender so that your interest rate never exceeds a maximum rate. This capping is generally not recommended because it normally costs money. 

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Expert Benjamin Manz
Benjamin Manz is CEO of moneyland.ch and an independent expert on banking and finance.
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