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Variable Rate Mortgages Compared

Swiss variable rate mortgages (VRMs) can be a puzzle at the start, so we at moneyland.ch have listed a few things you should know which can make your mortgage experience easier.

Unlike fixed rate mortgages (FRMs) and mortgages with rates pegged to the London Interbank Offered Rate (LIBOR), variable rate mortgages are open-ended, which means you can cancel them at any time. A 3 to 6 month cancellation period normally applies, unless you refinance to a fixed rate mortgage or LIBOR-pegged mortgage from the same lender. An added benefit is that, in contrast to fixed rate mortgages, many financial service providers do not set a minimum loan amount for variable rate mortgages.

Variable rate mortgages are no longer popular

But although variable rate mortgages offer a lot of flexibility, they only make up an estimated 5% of all mortgages in Switzerland. Fixed rate mortgages lead the Swiss mortgage market, followed by LIBOR mortgages. But this isn’t the case everywhere in Europe. Variable rate mortgages dominate the Spanish and Italian mortgage markets, for example.

It’s interesting to note that variable rate mortgages were not always unpopular in Switzerland. In the distant past, they were the preferred form of home financing, because mortgage rates were politically determined at the time, and even set the benchmark for property rental rates until 2008. The artificially low mortgage rates created by the political process made variable rate mortgages extremely attractive.

Variable rate mortgages are expensive

Premium variable rate mortgages may come with rip-off mortgage rates of up to 4 percent, and rates can get even higher than that for non-premium VRMs. As a rule, the cheapest options are online mortgages like those offered by the Glarner Kantonalbank (Hypomat). But at the current rate of 2 percent, even these don’t exactly qualify as low-cost mortgages.

In today’s low rate environment, the cost difference between fixed rate and variable rate mortgages is major. On top of that, most lenders apply the same VRM rates to all customers across the board, regardless of your creditworthiness. On the other hand, banks regularly offer special deals on FRMs that often undercut the going rate.

So why exactly are the interest rates for Swiss variable rate mortgages so high compared to the rates you get with LIBOR mortgage or fixed rate mortgage?

Today, the general interest rates set by the Swiss National Bank, which are determined independently of a democratic political process, are used as a reference point for overall interest levels. Banks and insurance companies have the liberty to set their own rates for VRMs and this has led to a paradox, with VRM rates hardly budging from their permanently high level.

«Variable» mortgage rates are virtually fixed

Some banks haven’t changed their VRM rates in 8 years. While rates for LIBOR and fixed rate mortgages have steadily gone down in recent years, the cost of variable rate mortgages as remained unchanged.

In a sense, variable rate mortgages in Switzerland have not lived up to their name. Although many banks claim that VRM rates are pegged to general interest rates, that claim no longer holds much water.

In actual practice, banks and insurance companies don’t adjust their rates according to the current situation in the overall mortgage market, but rather in keeping with the competition in the VRM market. This has created an impasse, with rates remaining high because lenders aren’t rocking the status quo.

So why would anybody want to buy into a variable rate mortgage in Switzerland?

On the one hand, there are always those poorly informed home buyers who ignorantly believe that VRM rates are regularly adjusted to match the changing mortgage market, and may drop in the near future.

But the bulk of VRMs are taken out by homeowners planning to sell their property in the foreseeable future. In that situation, a mortgage with a fixed tenure can be impractical. Because a variable rate mortgage can be cancelled shortly after the successful sale of your property, it’s often a more desirable option for short-term property investment.

Variable rate mortgages: The cons

Looking at the big picture, there are some pretty heavy arguments against getting a VRM in Switzerland. The biggest downside of variable rate mortgages is, obviously, the fact that rates are very high, and have not gone down in years. If getting a mortgage with a long-term, fixed tenure is at all an option for you, getting a LIBOR or fixed rate mortgage is a much more sensible option.

Then there’s the risk factor. VRM rates can, theoretically, change at any time. Taking on a mortgage with a variable rate makes your finances vulnerable to potential rate hikes. Unlike the clearly defined LIBOR-pegged mortgage rates, there are few clearly-defined rules regulating VRM rates and they do not follow a transparent index.

Variable rate mortgages: The pros

Swiss VRMs may appeal to you if flexibility in the way you repay your mortgage and the freedom to cancel your mortgage at any time you choose play a key role in your mortgage philosophy. A VRM can also provide an alternative if circumstances, such as the upcoming sale of your property, make long-term mortgage commitments of 2 years or more a poor choice.

The low minimum loan requirements are another potential benefit. A number of lenders do not set a minimum loan amount for variable rate mortgages. Other lenders do set minimums on VRMs, but at 50,000 or 100,000 francs, these are still quite favorable.

Variable rate mortgages: Compare rates

Comparing VRMs offered by different lenders is a must. Although VRM rates are generally high, the rates offered by different lenders can vary considerably.

If you want an unbiased overview of current VRM offers, check out moneyland-ch’s independent mortgage comparison tool. Select the «Variable Mortgage» option under «Requested Mortgage Model», enter some basic info about the mortgage you need and hit the «Continue To Results» button to get a clear list of current offers.

More information:
Mortgages compared

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The moneyland.ch magazine provides accurate, unbiased information on topics related to finance and money. In addition to research and expert interviews, the magazine contains numerous financial guides.