The mortgage wave is coming to an end. Of the 924 billion francs of mortgages outstanding at the end of 2015 in Switzerland, 419 billion ends between 2017 and 2021.
Thousands of households are affected. Those who have taken advantage of low rates to become homeowners will soon have to renegotiate the terms of their loan. And this, in a period that will see Swiss rates return to a semblance of normality, after almost a decade at the floor, or even below.
The Swiss National Bank’s (SNB) benchmark rates are projected to rise in 2018. And they could return to positive territory in 2019. A move that will inevitably have an impact on the cost of credit in general and mortgages in particular: they will increase them.
How to cushion the shock? How do you reduce your bill when you renew your mortgage? Roland Bron, the Romand director of the financial consultancy VZ, begins with a general council: “The situation in two years or more is very difficult to predict. On the other hand, those who have to renegotiate their credit in a year should think seriously about their strategy.”
1 Book a rate
Almost all banks offer the option of booking a rate. A “forward” rate, in the jargon, which is set before the maturity and renewal of the mortgage. A reservation is usually possible up to twelve months in advance, sometimes eighteen months. But ‘we advise to do it a year before at most. Beyond that, the costs are starting to get too high,” says Roland Bron.
Inevitably, the privilege of this booking comes at a price. That said, “since no one expects rates to rise imminently,” this insurance premium is now cheap. Its price will rise as financial markets begin to forecast rate hikes in Switzerland.
Read also: Swiss pay up to 3,000 francs a year overpaying for their mortgage (17 August 2016)
Currently, “we usually offer a rate up to three months in advance,” explains Bertrand Barbezat, president of the Vaud Federation of Raiffeisen Banks. On Thursday, setting aside a five-year fixed rate for a year cost 0.16 points. These are in addition to the interest rate set by the bank (1.30 – 0.16, or 1.43%).
Please note that customers of its establishment have the option to book a rate up to three years before their mortgage maturity.
2 Opt for a Libor rate. Or not.
Fixed-rate or Libor rate? The first solution has the advantage of providing long-term security for its budget. But the second also has an advantage: its cost.
The Libor formula is quite simple: the rate is adjusted to market rates every three months. If rates start to rise, the Libor can then be converted into a fixed rate “at any time and in 48 hours,” depending on the type of contract, says Bertrand Barbezat. But if rates fall again, the opposite is not possible, he insists. “It’s important to explain the rules of the game to borrowers.”
Today, a Libor mortgage can be obtained at a rate of about 0.9%. That’s 375 francs a month, for a mortgage of 500,000 francs. A five-year fixed rate costs about 1.2%. That’s 500 francs a month.
VZ did the math: between 2006 and 2016, for the same credit, the Libor option will have saved
63,500 francs in interest. However, this calculation does not foreshadow the potential savings that could be realized today or in a year or two.
This does not prevent our two specialists from finding this option interesting, given the stability of the rates. In addition, negative rates, which have been in effect in Switzerland since 2015, offer another advantage. They act as a buffer. They give borrowers more time to see it coming. “As long as rates do not exceed 0%, the Libor rate applied by banks will not change,” our interlocutors say.
The VZ expert believes that banks do not offer this formula enough. “It is part of our range of solutions,” replies Bertrand Barbezat. For example, in The Vaud Banks, 15 to 20% of the mortgage volume is now concluded at Libor rates.
Young households should secure a fixed rate over a long period of time, advises the Montagny-near-Yverdon (VD) manager. According to him, the use of Libor is more suited to those who have a certain financial area and/or a good knowledge of how this market works. There is one drawback to this option: you have to keep a close eye on the evolution of rates and to find out about the forecasts about them. Raiffeisen recommends that customers pay attention at least once a week.
4 Make the competition play.
Asking for multiple mortgage offers can have a significant role in the bill. Insurance, which is not subject to the same rules of the game, offers conditions that banks are struggling to compete with.
Comparison sites offer a fairly complete overview of the rates charged by lenders. These include Comparis, Moneypark or VZ tools. But none of them is worth a live negotiation with an advisor.
If another bank has a better offer, it is possible to transfer a portion of their mortgage. But there are several conditions: whether this tranche is equal to or greater than 100,000 francs. That the “new” bank has a guarantee that the rest of the mortgage will be transferred home when it matures. And that this deadline is not too far away.
In practice, “it is very difficult to convince a bank to take over a mortgage tranche,” says Bertrand Barbezat. This formula almost does not exist,” in particular because of the administrative complications associated with the mortgage schedule, this document which offers the lender the guarantee on a real estate guarantee.
This also makes the Raiffeisen manager say that “the staggering of durations smoothes the risks but it also reduces the mobility of a mortgage”.
5 Think about his future.
Finally, a piece of advice that, again, concerns all borrowers: we must embark on a real reflection on its medium-long-term future. Are we going to move, retire, divorce, change jobs, have children or see them leave the family home?
These are simple questions and difficult answers that you should think about. Because if so, “it’s better not to set a rate too long term,” according to Roland Bron. If a movie takes place during the term of the mortgage, there are several possibilities that are, in practice, quite complicated or penalizing.
Breaking a current contract? Penalties are important. Supporting your mortgage on your new home? But only if the purchase and sale are coordinated over time – a mortgage contract cannot fail to be backed by property, even for a few weeks.
Finally, the borrower who sells his home may also attempt to transfer his mortgage to the buyer. But in fact, cases, where the latter agrees to work with the same bank, for the same amount and on the same terms, are very rare, says Roland Bron.