The amount of the mortgage is relevant
The stated amount of the mortgage is important for deciding whether the loan should be split into tranches and if so, how many. Bankers recommend betting on two tranches if the loan amount is between CHF 250,000 and CHF 600,000. Higher amounts should be split into three tranches.
But not only the number of tranches is important, the average remaining term must also be kept in mind. If there are two mortgage tranches that run between two and six years, the average remaining term is four years.
With very low interest rates, most experts advise choosing an average remaining term of five years, so fixed-rate mortgages should have a term of at least seven years.
What problems can arise when the tranches are redeemed?
At best, all tranches expire within a period of twelve months, then the entire mortgage can be moved from one provider to the next. The transaction is smooth. However, it becomes more difficult if the endpoints of the tranches are more than twelve months away in the planned follow-up financing.
In this case it is difficult or even impossible to change the provider, the mortgage must be continued with the previous provider. Given the potentially high interest rates, this is not a desirable thing. The reason for this problem is that hardly any provider wants to take over individual tranches because the administrative effort involved is very large.
Debt notes must be split and promises to pay are changed. In addition, the risk for the individual institute is significantly higher because it would only take over the funding in second place. Hardly any bank will take this step, because if the borrower were unable to pay, all creditors would be served first. The necessary security for the bank is not given here.
Your chance to be able to transfer the tranches to a new provider at the same time is to synchronize them in good time. These should be extended in such a way that they expire as soon as possible or at most every twelve months.
An example: The mortgage, which was once taken out for over CHF 800,000, is divided into two tranches. Both are of the same height and amount to CHF 400,000. However, the first tranche only runs for five years, the other twice as long. The first tranche must now be extended by five years so that both can be replaced after ten years. Financing is then easily possible through another provider.
Tip: Plan the extension of the relevant tranche in good time and inform yourself about the further course of action about twelve months before the end of the financing. Here at neotralo.ch you will find valuable tips and find out which provider is ideal for your follow-up financing.
Advantages of mortgage splitting in tranches
The division into tranches makes sense for every borrower who wants to avoid having to extend the entire mortgage in one fell swoop. Experts therefore advise that the loan be divided into two tranches if the loan amount is more than CHF 250,000 but is still below CHF 600,000.
Various funding can be included in the planning. This includes, for example, early advances, gifts or paid life insurance. Caution: In the event of a divorce, the funds brought in must flow back or be credited to the partner who has contributed.
Disadvantages of dividing a mortgage into tranches
The disadvantages of carving are far more extensive than the number of advantages. The reason is the banks, which often struggle to finance a single tranche. If you have a tiered mortgage with one tranche expiring, you will hardly find another provider to take over the remaining tranche.
This provider would only be in second place and would have to resign behind all other demands. Hardly any bank takes this risk.
Another disadvantage is that the need to continue financing through the previous bank (because no other provider wanted to take over the open tranche) often means that unfavorable conditions have to be accepted. The previous bank is banking on the fact that you as the borrower have no other choice and have to accept the bad conditions. This is often associated with additional costs.
A last disadvantage, which should be mentioned here in terms of carving, relates to the poor predictability. If the mortgage is renewed bit by bit depending on the end of the tranches, the planning security is less well given.
In addition, the total budget load fluctuates strongly, which is not always easy to compensate.
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