The most important criteria when comparing mortgages

Comparing different types of mortgage loan and mortgage interest

Banks are required to gain customer approval for the securitisation of mortgages, which is why their mortgage contracts include a transferability clause. This type of clause is now the rule rather than an exception, and has become common practice among major Swiss financial institutions.

Property buyers value the confidence a fixed-rate mortgage contract affords. The interest rate is fixed at the completion of the contract and remains unchanged for the entire term, thus giving the borrower complete budget security. However, it should not be assumed that a fixed-rate mortgage necessarily offers the lowest mortgage rates in comparison with other forms of mortgage loan. Besides a fixed-rate mortgage, a variable-rate rate mortgage and a LIBOR mortgage are the alternative options available. Here you will find the most important factors to consider when comparing the interest rates for these three types of mortgage:

Fixed-rate mortgage: The mortgage rate quoted is also influenced by the duration of the loan term and the credit rating (i.e. credit-worthiness) of the borrower. How banks and insurers incorporate these factors into their calculations will vary according to the mortgage product. Generally speaking, shorter mortgage terms will attract a lower interest rate, and where the property buyer can contribute a deposit which represents a higher proportion of the purchase price, this too will be often be reflected in a more favourable interest rate. However, it should be noted there is no guarantee that lowering the loan-to-value ratio in this way will persuade all lenders to offer a lower interest rate.

Variable-rate mortgage: This type of mortgage loan gives the borrower the most flexibility, but in the past it has also been the most expensive method in comparison with other Swiss mortgage interest rates. There is no fixed term, but borrowers must observe a cancellation period which is usually three to six months. The interest rate is continuously adjusted in response to capital market developments. A borrower’s credit rating will not usually influence the calculation of mortgage interest rates.

LIBOR mortgage: This type of contract uses similar mechanisms to those encountered with a variable mortgage. For instance, the interest rate is also adjusted during the term – mostly every three months. However, unlike a variable mortgage, the borrower and the mortgage lender must agree a fixed term. Furthermore, a LIBOR mortgage is more transparent than a variable mortgage because it is directly linked to the London Interbank Offered Rate (LIBOR). Borrowers pay the LIBOR base rate plus a set margin, so when comparing interest rates between lenders they will differ slightly because each applies an individually determined margin on top of the LIBOR rate. In the past, a LIBOR mortgage has often yielded the lowest interest rate over the entire term for all three types of mortgage.

The financial climate as a factor in mortgage interest comparisons

Which of these options will prove the best depends to some extent on the economic forecasts available at the time of completion. The fixed-rate mortgage is a popular choice, especially when interest rates are low, because the borrower then benefits from a future rate which is ‘frozen’. On the other hand, a variable or LIBOR mortgage is more likely to be recommended if future interest rates are expected to fall. How accurate predictions of falling interest rates turn out to be will always depend on the market conditions.

When comparing mortgage contracts, MoneyPark consultants analyse products offered by more than 100 providers. Our strategic consulting considers market options alongside your personal situation and the prevailing financial climate. The advice we offer is always independent, competent and tailored to your personal circumstances.