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Pension funds: the first point of contact for a mortgage

Pension funds: the first point of contact for a mortgage

The mortgage market is hotly contested and there are always special offers. However, these offers from the mortgage banks cannot beat those from the pension funds. It so happens that in the first half of 2021 over a quarter of the mortgage volume was brokered through the pension funds.

Thanks to good conditions, pension funds are growing significantly

For many Swiss people, pension funds are now the first point of contact when it comes to a mortgage loan. In the meantime, the pension funds have achieved a share of more than 25 percent of the total mortgage volume. In view of the predominantly very low interest rates (current interest rate for the majority of pension funds is below one percent), it is not surprising. Banks don't even get half of that low interest rate. At the same time, the pension funds offer a customer-friendly term. Longer mortgage terms are almost exclusively offered here. These are usually ten years or more.

This makes it clear: Even if the banks are still the top dogs and more than three-quarters of all mortgages are provided in Switzerland, the pension funds are still growing proportionally. Mortgages can only be taken out with pension funds via appropriate brokerage platforms, through which own products could also be brought onto the market. If you want to buy a house now, you can benefit from the good conditions of the pension funds.

Conditions that nobody else has?

Pension funds seem to know how to assert themselves in the market and not only with the above-mentioned conditions, which are extremely cheap. They even have offers in their program that no bank can compete with, because these offers simply do not exist on the bank side. In some cases, it is possible to terminate the mortgage prematurely and not have to accept any penalty payment. This is unthinkable with banks, because they get the interest loss back by early redemption through such a penalty payment. Many bank customers therefore prefer to think again whether the replacement is really worthwhile or whether any possible savings will not be eaten up by the penalty payment. The pension funds, on the other hand, offer free exit, which is a great advantage for customers.

The mortgage business is still profitable for pension funds, as they can make numerous investments with the money available. The mortgage is even more lucrative for them than safe government bonds, and the risk with mortgages is even lower than with real estate. The pension funds are now investing around three to five percent of their capital in mortgages. That doesn't sound like much at first. On closer inspection, however, it is a lot of money, because up to a billion francs are invested here.

Conclusion: prefer to take out mortgages with a pension fund

For example, if you want to take out a mortgage to build a house or buy a property, you should definitely look at the conditions of the pension funds when comparing loans. These are extremely cheap and can only be compared with a few banks. The reason is, on the one hand, the low interest rates, which are usually below one percent. On the other hand, the terms are very long to be agreed, which offers a high degree of security, especially in view of such a high sum as is required for real estate construction. It is also possible to arrange for the mortgage to be redeemed early without paying a fine, which is not the case with all pension funds. If something like this is envisaged, the mortgage partner should be assessed accordingly before the contract is concluded.

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New record low: mortgage interest rates are plummeting

New record low: mortgage interest rates are plummeting

Those who bought property or who renewed their mortgage in the last year have good prospects of high savings potential. It is interesting that pension funds often offer better conditions than conventional banks.

Record low in mortgage rates

Anyone who bought a house or apartment in 2020 or who extended their existing mortgage has reason to be happy: Mortgage interest rates are at a record low. The fixed-rate mortgages are almost noticeable because they are the most popular form of loan and offer high interest savings. The savings that the Swiss were able to make in 2020 were even greater than they had been for five years. Those who negotiated well during this time were able to save between 16 and 20 percent compared to the standard rate. In the previous year, i.e. in 2019, the savings were even higher, the mortgages were around 22 percent cheaper than in 2018. The actual mortgage rates were therefore particularly low.

With smart calculations and skilful negotiations, tens of thousands of francs can be saved over ten years. It is above all the alternative providers who make particularly good offers. Pension funds and insurance companies stand out particularly clearly in comparison and offer high savings. The amounts that are possible as savings are always the comparative values to the reference rates published by the banks.
The low mortgage rates may have been at least partially decisive for the purchase, even if the prices for houses and apartments have increased significantly in the past year. Especially houses that are located away from the big cities and centers are in high demand. This is certainly not only due to the fact that the Swiss want to enjoy a little peace, but that they can also find it here in Corona times.

Big growth in pension funds

Insurance companies and pension funds are referred to as alternative providers, but they have grown steadily in the environment of permanent low interest rates. Pension funds in particular grew the most recently and were able to achieve growth of more than 36 percent between 2014 and 2019. At the end of 2019, assets under management were around CHF 18.6 billion.

The market share of the pension funds is still only 1.7 percent. The banks hold the majority, and here it is mainly the cantonal banks that hold assets of more than CHF 400 billion. But the pension funds are slowly becoming competition for the banks, because everyone with a correspondingly high income or verifiable assets can enjoy the advantages of the pension funds. They are much more flexible than the banks and offer variable mortgages in addition to fixed-rate mortgages. In some cases, it is even possible to get out of the fixed-rate mortgage free of charge, which is especially good for those who are planning to sell their property.

However, it is not possible for everyone to get a mortgage from the pension fund. The scope for granting the loans is very narrow. In some cases, the mortgages are only granted for private homes; holiday homes cannot be financed with them. But those who manage to graduate can benefit from very good conditions.
Pension funds even offer a return, so it is still worth investing in them. The risks are low.
However, experts assume that it will be years before pension funds can significantly expand their market share. In addition, many Swiss see their house bank as the bank they trust: Around 70 percent of Swiss people who want to take out a mortgage turn to their house bank first, and offers from competitors are rarely obtained.

Conclusion: take advantage of low mortgage rates now

Mortgage interest rates are lower than ever, which is particularly helpful for a planned purchase of a property, as property prices continue to rise. The offers of the pension funds are primarily of interest here, although they are not suitable for all. But it is worth taking a look at the competition from the long-established banks!

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These are the mistakes you should avoid in making your dream of owning your own home a reality

These are the mistakes you should avoid in making your dream of owning your own home a reality

Do you want your dream of your own house to come true? Then there are a lot of stumbling blocks waiting for the builders. There are some mistakes that are made all too often and that can be very expensive, but which can easily be avoided with the necessary prior knowledge.

Requirements for future property owners

Obviously, anyone who wants to build a house or buy a condominium needs money. In addition, sufficient equity must be available, whereby around 20 percent of the purchase price can be assumed. This is exactly where the first problem lies, because the bank's valuation does not have to correspond to the purchase price of the property. That means: the demand for real estate is high, the interest level is low. The price has risen enormously recently, with many sellers wanting to sell their buildings at exorbitant prices. The bank, however, sees the matter in the long term and would like to secure the mortgage loan for a long time. She will evaluate the object separately and sometimes comes to different values than the seller. The resulting differences between the purchase price and the determined lending value of the bank must be secured by the buyer's own funds. However, these are often not taken into account in the planning.

An example: The property is to cost CHF 800,000 and equity of CHF 200,000 is available. In order to calculate the affordability of the property, the purchase price, equity and income play an important role. Affordability is calculated using imputed interest rates that are significantly higher than the normal mortgage rate. They are located at around five percent, although the individual banks differ slightly on this point. The reason for this high value is very simple: if interest rates rise again, the financing is still secured because it was calculated from the outset on the basis of the less favorable interest rate. The bank now finances a maximum of 80 percent of the purchase price and divides the amount between two mortgages. The first amounts to more than 66 percent of the total, the second to a maximum of 14 percent. The second mortgage has to be repaid within 15 years, whereby the latest date of entry into retirement age is shown.

In addition, the ancillary costs and the costs incurred for maintaining the property must be included. The bank will assume around one percent of the purchase price.
It is now assumed that the monthly burden of interest, amortization and ancillary costs should not exceed a third of the gross income of the borrower. In the above example, this would have to earn around 10,700 francs a month in order to be able to make all payments if the imputed interest rate of five percent is calculated. This shows that a mistake made by many willing borrowers is to underestimate the monthly burden. The demands on borrowers are high!

Avoid typical mistakes

For some people, a house or condo is just a way to live. Such a property is usually associated with emotions and quite a few people literally fall in love with a house that they then absolutely have to buy. But one of the worst mistakes is to give in to that infatuation and buy a house that you can't afford. The threat of over-indebtedness quickly kills love!

Another mistake is not to make provisions. A mortgage is taken out for a very long period of time and it is almost certain that interest rates will go up at some point. Anyone who has received the loan should therefore always make sure to set up regular provisions in order to be able to absorb any increases in interest rates. So you can look more calmly into the future!

In order to get the necessary equity, another mistake is often made: Money is withdrawn from the pension fund, which consequently offers less performance. Not really a problem, but sooner or later it must be possible to close the gaps that have arisen. Otherwise, the money would be invested in the dream home now, but the money would be missing later when you draw your pension. And then maybe the sale of your home is threatened because it has simply become unaffordable.

Conclusion: The biggest mistakes are in the financing

The worst mistakes a builder or homebuyer can make are planning their financing. This is usually approached too tightly, so that the equity capital actually required is not available. Or the credit burden of a maximum of one third of the gross income does not fit, more money is needed for the mortgage. This in turn leads to frustration and, in the worst case, to insolvency for all other payment obligations.

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Mortgage interest rates: Big differences among providers

Mortgage interest rates: Big differences among providers

Ten-year federal bonds are seeing rising yields, but the interest on mortgage loans has so far only risen slightly. However, many providers start with adjustments that make a loan more expensive. 

Interest rates rise only a little

Since the beginning of January 2021, it has been observed how the interest on ten-year federal bonds has risen more and more. Are you from? 0.56 on? 0.43 higher, with US Treasuries behaving similarly. Their returns have also increased and have now reached over one percent. The "Confederation", as federal bonds are also called, is usually referred to as the most important driver of mortgage interest rates: as it rises, so do lending rates. But this cannot be observed at the moment, the average interest rate has increased from 1.05 to 1.06 percent, but that is a negligibly small increase. Experts see the overarching trend as decisive and this says that interest rates continue to fall, as they have for years.

The trend that interest rates continue to fall was recently interrupted by the Corona crisis, in between they rose slightly and reached average values of 1.15 percent. The trend now seems to be back to the 0.98 percent that was awarded before the crisis. Experts from the financial world suspect that one reason why mortgage rates will not rise is because they are expected to remain low for years. The governments have to provide huge sums of support money, the national debt is growing significantly. The experts see a connection here and assume that interest rates will remain low.

Providers react differently

However, individual providers have adjusted their interest rates, with the providers who have already charged higher interest rates, now rising even further. Providers with rather low interest rates, on the other hand, have not followed suit and have lowered their rates even further instead of increasing them. The cheapest is currently (as of February 2021) the Internet service hypoclick, which only requires 0.767 percent. The so-called shop window prices, however, require a very good credit rating. Anyone who arrives here with poor payment behavior and is not given a good credit rating will of course not be offered this interest rate.
The Bühler pension fund is only slightly more expensive, with a rate of 0.79 percent, and the BVK and the Swiss Post pension fund have also lowered their interest rates for mortgage loans. Raiffeisen Bank, on the other hand, has gone up with its interest rates for ten-year mortgages and is currently charging 1.35 percent. The offers of the Zuger Kantonalbank are similar.

So are the prospects

There is a long-term trend not only in terms of the weather, but also in mortgage loans, and it currently looks as if the low interest rate level will last for a long time. A lower interest rate than now is possible with some providers, but the experts do not determine how long this will be the case. It is quite conceivable that the current low interest rate environment will change, although noticeable interest rate hikes cannot be ruled out in the coming years. Nobody wants to commit themselves correctly because the influences, for example due to the Corona crisis, cannot currently be precisely weighed up.

Conclusion: interest rates on mortgage loans remain low

Nevertheless: Even if the current interest rates for mortgage loans are low and apparently still remain low, some providers are pulling slightly. If you want to take out a long-term mortgage now, you shouldn't hesitate too long, because the interest rates will not go much lower. At most, they will remain at their current level before they pick up again. It is also interesting that the interest rate differentials are very small, on average and based on the comparison of a two-year and a ten-year term. Finance experts therefore assume that someone who now takes out a ten-year mortgage will be better served than ever before and will have the greatest possible planning security.

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Prices for single-family houses rise by more than two percent

Prices for single-family houses rise by more than two percent

The prices for single-family houses have risen sharply in Switzerland in recent months. In the meantime, the price increase has exceeded the mark of 2.3 percent, whereby only the months from June to December 2020 were considered.

Popular fixed rate mortgages set for a minimum of ten years

It is still the ten-year fixed-rate mortgages that the Swiss take out most often to buy real estate. They offer the advantage that the new property owners know exactly what mortgage costs to expect in the coming decade. It is noteworthy that the French-speaking Swiss usually take out longer-term mortgages than the German-speaking Swiss. Around 85 percent of the former are for long-term contracts and thus for those that are set for at least ten years. The latter, on the other hand, only complete around 73 percent of these for such a period. Only around 20 percent of the mortgages were taken out for a very long period in the second half of 2020 and therefore for eleven years or longer. The terms between five and ten years are therefore the most popular.

Banks as the most important partner in matters of mortgage

When it comes to the mortgage, the banks are the most important partners for customers. Around 70 percent of all mortgage deals in Switzerland were placed with a bank. The alternative lenders have still not achieved a dominant position, around 20 percent of the Swiss turn to the pension fund instead of a bank to finance a property. The share of banks thus increased significantly in the second half of 2020 and is now around 10 percentage points more than in the same period of the previous year. The expansion of the supremacy of the banks is at the expense of other lenders, who have been equally less popular.
Tip for mortgage borrowers: A comparison of the various providers is highly recommended!

Rise in prices for single-family homes across Switzerland

The fact that prices for single-family houses are rising can be seen throughout Switzerland. Condominiums are also continuing to rise, although they have not seen as much. In the same period (June to December 2020) they only increased by around 1.5 percentage points, while for single-family houses it was the aforementioned 2.3 percentage points compared to the same period of the previous year. There are, however, differences: In western Switzerland, prices also rose, but only by around 1.9 percent. In eastern Switzerland, however, it was 2.2 percent.
In terms of apartments, a positive trend can generally be seen for all property sellers, with eastern Switzerland also seeing significantly stronger demand here. In the French-speaking part of Switzerland, on the other hand, the trend is slowing, and the demand for condominiums has fallen significantly here.

Conclusion: Real estate prices continue to rise despite the Corona crisis

Even if the popular opinion is that the number of people interested in real estate will decrease thanks to the uncertain economic situation due to the corona pandemic, real estate prices show that demand is even increasing. Because only rising demand would explain the rising prices, which are noticeable at around 2.3 percent throughout Switzerland. The higher real estate prices are also noticeable for condominiums, although these are not rising to the same extent as the prices for single-family homes.

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Finance a property with a mortgage?

Finance a property with a mortgage?

Can a property be financed without taking out a loan? Or is the mortgage the only way to get home ownership? Here are the advantages and disadvantages of loan financing

Financing property without a mortgage: the advantages

In general, it should be the safest way to finance a property without a mortgage if it does not tie up all of your liquid funds. In most cases, however, it is not possible to finance the dream property with your own funds, because it is simply too expensive and so much savings are not available. The interest on a mortgage is currently very low, but of course a mortgage always involves the commitment to borrowed capital, that? Bought? becomes. This purchase works through the interest that is payable in addition to the actual purchase price of the property. This can be more or less expensive depending on the current interest rate situation.

Anyone who finances the property without a mortgage therefore does not deliver any additional money to the bank, but invests everything in the property. Critics may say that the money can be invested more profitably in the capital market, so that the return is higher than the interest to be paid. That may be correct, but there is always the risk of default on the capital market to consider. Those who invest their money and thus take a risk can also lose. This in turn means that there is significantly less equity available and the property also has to be financed with a mortgage. Nice dividends are possible, but associated with high risk and price fluctuations.

Disadvantages of financing a property through a mortgage

The advantages of financing a property with equity already explain the disadvantages of financing with a mortgage. Above all, the bank earns money here, because the interest rates, which vary depending on the creditworthiness and term of the mortgage, add up to many thousands of francs, for which the bank does nothing more than provide the desired money. Financing the property with a mortgage provides a certain amount of financial leeway. The saved capital can flow into further investments that are related to the property, so there are no financial shortcomings in terms of repair and renovation costs or costs for the initial furnishing of the newly built house. Without a mortgage, therefore, less money is tied up, although the long-term nature of the tied up capital can be a problem.

Financing the property with a mortgage can have another disadvantage: the age of the mortgagee. After a certain age, the banks are very reluctant to grant a loan because they assume that the person in question may no longer be able to make the repayment. Most people over 60 are viewed critically. Then, in turn, significantly more collateral is required with which to cushion the eventual payment default.

Conclusion: Good arguments for financing with a mortgage

Even if a mortgage is tied to the bank and interest has to be paid, which makes the property more expensive, this way is often cheaper or even the only way to buy your own apartment or house. The equity is available for other expenses, and there is usually not enough of your own capital to cover the purchase price, additional fees and even set-up costs without running into another financial bottleneck.

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Mortgage landscape in Switzerland: Swiss banks will survive Corona well

Mortgage landscape in Switzerland: Swiss banks will survive Corona well

Corona also has Switzerland firmly under control and yet the economic consequences here could be more bearable than in many other countries. Nevertheless, new dangers are already in sight that could ultimately have a significant impact on banks.

Nervous economy in Switzerland

As everywhere in the world, the economy in particular is suffering from the consequences of the corona virus and the restrictions on public life. In spring 2020, a shutdown was imposed in Switzerland, which was supposed to break the first wave of infections and which had a very negative impact on the economy. But the consequences of the shutdown still had to be compensated.

In view of the renewed wave, there is now great fear that a lockdown could bring everything to a standstill. Experts agree that a complete closure of many industries could have such a negative impact that the number of bankruptcies is likely to skyrocket.

The banks are also suffering from the measures that have been imposed to combat the virus. Allegedly, 2021 could be the toughest test the financial industry has ever had to go through. The reason: The support services that the state can provide are not made to last and cannot be sustained for long. They should stabilize the banks and primarily help borrowers so that they do not become completely over-indebted.

But the banks are being forgotten about it. You have counted on the interest income, which you will now completely or at least partially lose. How great the damage is already will become clear as soon as state aid fails to appear. It was found by financial experts that the dynamics of the economic downturn cannot be compared with that after the financial crisis. The economies were and are strongly supported by the tax authorities, which was not the case during the financial crisis. The financing markets are currently still stable. Overall, the banks are better equipped to deal with what is to come than they were in 2009.

The economy is still stable

In contrast to the economies of other countries, the one in Switzerland could still come out of the crisis with a black eye. Even if the Swiss banks are less profitable and assets or their quality will deteriorate, the Swiss banks can contain the credit losses more strongly and are not completely defenseless as in other countries.

The reason for this is Switzerland's inherently more stable economy, where loan defaults are particularly low. In addition, the quality of the loans is completely different than in other countries. In Switzerland, mortgages are mainly given instead of the otherwise usual consumer loans, which in turn ensures that assets can be supported in the economic crisis.

However, the next problem is already evident. The pressure on margins will continue to be maintained by low interest rates, but profitability could decline for political reasons. The reason: The imputed imputed rental value has been abolished, which could reduce the size of the loan books and the capacity of the banks' income.
It is interesting that the Corona crisis and its economic effects are currently only rarely observed by Liechtenstein. There you are unimpressed by the crisis that is keeping the world in suspense. The banks' earnings base was only a little weaker temporarily, after which assets recovered very quickly.

However, one thing remains to be said: private banks are heavily dependent on investor confidence and a lack of confidence can result in a significant outflow of funds.

Conclusion: the Swiss economy and banks are doing well so far

The Swiss banks and the country's economy are still doing well to very well in view of the ongoing Corona crisis. In contrast to many other countries, you have so far got away with a black eye and therefore we can only hope that the crisis will soon be over. How long banks and the economy can hold out without suffering long-term damage cannot currently be stated.

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Mortgage rates rise again in November

Mortgage rates rise again in November

In November 2020, long-term mortgage rates rose slightly after a long period of time. If one assumes ten-year housing loans, the guideline rate for mortgage interest is on average over one percent.

First decrease, then increase again in mortgage interest rates

In October mortgage rates on fixed-rate mortgages that were set up for ten years had fallen slightly. However, only by an average of 0.04 percent. They rose by the same value in November 2020 and are now at an average of 1.03 percent. In a historical comparison, however, the interest rate is still extremely low and far from heading towards a new high, as was already partially feared.

According to experts, the cheapest rate for mortgages taken out over ten years actually fell slightly in November, despite the higher average value. In September it was Zurich Insurance where the cheapest value was to be had. The mortgage interest there was only 0.84 percent. In October it was up to Homegate to offer the lowest interest rates, which were 0.79 percent. It is currently the BVK pension fund, located in the canton of Zurich, that offers an interest rate of 0.78 percent for ten-year mortgages. The BVK has not followed the general trend and has reduced its mortgage interest rates instead of increasing them as usual.

Consistent rates for shorter mortgages

Mortgages that are only taken out for a period of two to five years are still similar in terms of mortgage interest rates as before. The interest rates have changed little or even stayed the same. They are a little higher at Raiffeisen, but the Zürcher Kantonalbank has revised its interest rates downwards. Experts in the financial world agree that interest rates are unlikely to change dramatically so quickly, because it is assumed on the capital market that interest rates could remain so low for a long time.

The European Central Bank does not yet give any hope that the deposit rate could be increased. It is currently minus 0.5 percent. Until recently, a planned tightening of negative interest rates was under discussion, but this problem seems to be off the table. But it remains to be expected that the European Central Bank will loosen rather than tighten its interest rate policy. Incidentally, this also applies to the Swiss National Bank, which also has a negative interest rate and, with the current minus 0.75 percent, wants to ensure that the Swiss franc appreciate too much. In addition, strong interventions on the foreign exchange market are accepted or even forced.

The situation with long-term interest rates appears to be completely different. According to Credit Suisse, should the economy pick up, it can be expected that interest rates will rise significantly and that mortgage rates for ten-year mortgages will be particularly affected. It is therefore all the more worthwhile to compare the providers of mortgages and carefully examine their conditions. After all, the mortgage market is still seen as a buyer's market.

Bottom line: higher interest rates on ten-year mortgages

While mortgage rates have fallen over the past few months on loans that run for two or five years, they have risen on mortgages that are fixed for at least ten years. Experts even assume that mortgage interest rates will continue to rise in the near future, but this also only applies to long-term mortgages. Short- and medium-term mortgages could be spared and continue to come up with low interest rates or even negative interest rates.

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Take care of the financing? despite the mortgage

Take care of the financing? despite the mortgage

Many people feel that once they have the mortgage in place, they won't have to worry about further financing. The mortgage is only an important part of the total real estate financing that goes well beyond that.

Mortgage and other aspects of financing

It's done: the mortgage has been taken out and will run for the number of years provided. It is an important part of the overall financing for a property. But given the term of a mortgage, it's clear that a lot can happen here. The living conditions in ten years' time may not be the same as they are now, maybe the main breadwinner has also failed.

A lot can happen, from disability to divorce and death, and even a simple addition to the family can mess up the entire financing. This means that both happy and sad, but always unforeseen events can cause a major financial mess. The age at which the mortgage was taken out also plays a role: If you took out a mortgage a few years before retirement, you must make sure that it is still sustainable even if you lose regular income.

All of this must be taken into account when planning funding. There are different ways of protection, some of which can even have a tax-optimizing effect.

Save with the 3rd pillar

The 3rd pillar is a very good way to save money in an emergency. Because the saved money can be used to amortize the mortgage if necessary, and it also offers the opportunity to secure your own family. This applies to the death or disability of the main earner and saver. Last but not least, savings in the 3rd pillar can save taxes, which in itself should be an incentive in itself.

Every year, a certain amount can be claimed in the tax return for retirement provision, whereby the contributions to savings can go to banks or insurance companies. The balance from Pillar 3a may be included if it is used for the purchase, the amortization of the mortgage or for conversions and renovations of owner-occupied residential property. If self-employment is started or a disability occurs, the credit may also be offset against tax. 

This also applies if the saver emigrates or if he uses the money five years before regular retirement. The contributions that are paid in here can be deducted directly from taxable income. When withdrawing the money, a tax is also due, but this must be offset against the reduced tax rate.

The contributions that are paid into pillar 3b can only be partially deducted from income or with restrictions. The payment of the credit is tax-free, and a benefit in the event of death can also be set here. This is particularly helpful if unmarried couples buy their own home and the possibility of preferential treatment in pillar 3a is too limited.

Value-preserving measures are also deductible: If a new kitchen is installed or the roof is re-covered, the expenses for it can be deducted from taxable income.

Conclusion: The financing must always be kept in mind

Much can happen in the course of a mortgage that was not foreseeable. It therefore makes sense not to lose sight of the financing as a whole and to check it again and again over time. With a home in particular, the first major renovation work has to be carried out after around ten to fifteen years, which must also be financed.

A new roof or a new heating system swallows up huge sums of money that was usually not saved on the side. Such expenses must be taken into account as well as the possibilities that arise from a tax point of view. Expenses for owner-occupied residential property can be offset against tax and reduce the taxable income. The 3rd pillar of pension provision, which is also relevant for tax purposes, must also be taken into account.

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The end of the Libor mortgage is imminent

The end of the Libor mortgage is imminent

For a long time, Libor mortgages were the cheaper option, while fixed-rate mortgages were usually the most expensive. But the Libor is to be abolished by the end of 2021. Money market mortgages will still exist, say the financial experts.

The Libor mortgage as the most common form

In the past, a Libor mortgage has always been particularly attractive and has turned out to be a much cheaper form compared to a fixed-rate mortgage. Actually, Libor mortgages are also only fixed-rate mortgages, albeit with very short terms, usually only a few months.

The LIBOR (London Interbank Offered Rate) determines the amount of interest that is charged for this type of mortgage. The Libor is an average of the interest rates that are relevant for banks. The interest rate would correspond to what banks would borrow or borrow on the money market in Europe. The term for this borrowed money is always set at twelve months.

Now the Libor will be abolished by the end of 2021. It will be replaced by another interest rate that appears more suitable as a reference interest rate.

That brings the abolition of the Libor

The experts are of the opinion that the Libor is too unrepresentative and that there are no real deals that can be concluded for some of the maturities of the Libor. In addition, the Libor is now to be abolished by the end of 2021 because many banks had used it for their own benefit and reaped the profits they made on interest rate derivatives themselves. The Libor also helped to avoid losses on interest rate derivatives, but again thanks to the influence of the banks in their own favor.

The principle of the money market mortgage will still exist after the end of the Libor, but it will then be called a different one. In Switzerland it will be the Saron, the? Swiss Average Rate Overnight ?. Unlike the Libor, the Saron is calculated on the basis of transactions that have actually been carried out, with the SNB and SIX as exchange operators being responsible for calculating the Saron. It should not be possible to manipulate the Saron.

Most money market mortgages are only designed for a term of three or six months. This will not apply to the Saron, because it represents the interest rate for a single day. The National Bank has put together a working group which, in turn, has calculated various options for using the Saron for money market mortgages. A total of seven variants have come out here, whereby a common component of the Saron is always the Compounded Saron. This represents an average value of the Saron in the past.

Many banks have limited the Libor, which is still valid, to a term until the end of 2021. Others no longer offer such mortgages at all and recommend the common fixed-rate mortgages to their customers. The reason: the bank earns significantly more on a fixed-rate mortgage than on a money market mortgage, and customers cannot simply switch to a more affordable form of mortgage as soon as interest rates rise.

Experts suspect that many banks will use the changeover from Libor to Saron to raise interest rates directly or to achieve larger margins.

Conclusion: The end of the Libor mortgage is imminent

The time will come at the end of 2021 and there will be no more Libor mortgages. Some banks are already no longer granting such mortgages and prefer to sell their customers the fixed-rate mortgages, which are much less attractive to the mortgagee.

This type of mortgage is better for the bank as it is more expensive for customers. From the point of view of the banks it is understandable that the Libor should be exchanged in favor of the Saron, which is better for them, from the point of view of the customers it is now: keep your eyes open when buying a mortgage!

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