adjustable rate mortgage switzerland guide
Loans & Mortgages

Adjustable-Rate Mortgages Explained

July 27, 2022 - Benjamin Manz

Swiss Adjustable-rate mortgages (ARMs) 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.

In Switzerland, adjustable-rate mortgages (ARMs) are often referred to as variable mortgages. Unlike fixed-rate mortgages (FRMs) and mortgages with rates pegged to the London Interbank Offered Rate (LIBOR), Adjustable-rate mortgages are open-ended, which means you can cancel them on short notice. The notice period is normally between just 3 to 6 months, unless you refinance to a fixed-rate mortgage or LIBOR-pegged mortgage from the same lender (in which case immediate termination may be possible). An added benefit is that, in contrast to fixed-rate mortgages, many financial service providers do not set a minimum loan amount for adjustable-rate mortgages.

Adjustable-rate mortgages are no longer popular

But although Adjustable-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. Adjustable-rate mortgages dominate the Spanish and Italian mortgage markets, for example.

It’s interesting to note that Adjustable-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 Adjustable-rate mortgages extremely attractive.

Adjustable-rate mortgages are expensive

Premium Adjustable-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 ARMs. 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 adjustable-rate mortgages is major. On top of that, most lenders apply the same ARM 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 Adjustable-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 ARMs and this has led to a paradox, with ARM rates hardly budging from their permanently high level.

“Variable” mortgage rates are virtually fixed

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

In a sense, Adjustable-rate mortgages in Switzerland have not lived up to their name. Although many banks claim that ARM 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 ARM 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 Adjustable-rate mortgage in Switzerland?

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

But the bulk of ARMs 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 Adjustable-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.

Adjustable-rate mortgages: The cons

Looking at the big picture, there are some pretty heavy arguments against getting a ARM in Switzerland. The biggest downside of Adjustable-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. ARM rates can, theoretically, change at any time. Taking on a mortgage with a Adjustable-rate makes your finances vulnerable to potential rate hikes. Unlike the clearly defined LIBOR-pegged mortgage rates, there are few clearly-defined rules regulating ARM rates and they do not follow a transparent index.

Adjustable-rate mortgages: The pros

Swiss ARMs 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 ARM 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 Adjustable-rate mortgages. Other lenders do set minimums on ARMs, but at 50,000 or 100,000 francs, these are still quite favorable.

Adjustable-rate mortgages: Compare rates

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

For an unbiased overview of current ARM offers, just use the unbiased mortgage comparison tool on moneyland.ch. Select one of the variable mortgage options under “Requested Mortgage Model” and enter some basic info about the mortgage you need and hit the “Continue to results” button to get a clear list of current offers.

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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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