A comparison of the three mortgage types and their respective interest rates

Mortgage interest rate comparisons

As regards real estate financing, it is not possible to categorically state which type of mortgage loan is the most attractive. However, experience based on actual values and the mechanisms governing interest calculations indicates some conclusions about trends. Over the past few years, the LIBOR mortgage has offered the lowest interest rates compared to the other forms, followed then by the fixed-rate mortgage, with the variable rate mortgage proving to be the most costly financing option.

An important reason why a LIBOR mortgage can be a low interest option is the direct link to the LIBOR rate. Most importantly, this determines the rate at which bank lending takes place on the money market. In recent years, this reference rate has been very low, which in turn has had a direct influence on LIBOR mortgages. Furthermore, the margins banks have added on top of the LIBOR rate have also been very low.

The other two forms of mortgage are also influenced by money market developments. However, interest rate calculations become less transparent here, because the banks are not obliged to adjust their mortgage rates directly in accordance with money market fluctuations. As a result, with variable and fixed-rate mortgages banks have the option to cushion interest rate increases rather than to directly mirror rate changes as they occur.

You can compare how mortgage rates have increased with our tool for tracing historical interest rate trends.

Mortgage interest rates and flexibility

Although the LIBOR mortgage has offered the most favorable conditions in the past, the majority of Swiss people have still opted for the fixed-rate mortgage. The main reason for this has been greater financial security: With a fixed-rate mortgage, the rate of interest remains unchanged irrespective of any changes in interest rates during the agreed loan term. Fixed-rate mortgages tend to be even more popular if a low-interest phase has persisted for a certain period of time and Swiss National Bank experts anticipate that monetary policy measures are about to raise interest rates.

In the case of a variable mortgage, the customer is not tied to an agreed loan term. So if an interest rate increase occurs, he is free to withdraw from the mortgage prematurely – provided, of course, that the previously agreed notice periods are observed. LIBOR mortgages, on the other hand, are only offered with fixed loan terms. In the event of an interest rate increase, the LIBOR can be converted into a fixed-rate mortgage or an arrangement which specifies an upper limit to which interest rates may rise. The mechanisms provided for these options are known respectively as a switch option and an interest rate cap.

The switch option allows a change to a fixed mortgage at an agreed time, such as when the next interest rate adjustment occurs. After the change, the remaining term of the previous loan agreement must also be honored, though it is usually also possible to agree a longer term, if required. The interest rate valid at the time of this change will then apply throughout the fixed term of the loan. On the other hand, an interest rate cap sets the level to which interest rates may rise, and this cap cannot be exceeded. Capping works exactly like an insurance – so if a customer chooses a cap option, he will pay a premium for the privilege, irrespective of whether or not the cap is activated.