What affects mortgage interest rates?

Decisions of the Swiss National Bank

The Swiss National bank has a crucial impact on the development of mortgage rates in Switzerland via its target range for the 3-month LIBOR. This is its most important monetary policy instrument. Depending on their own costs for the procurement of funds, mortgage lenders transfer financial costs to their customers. If the conditions for the banks improve, this is usually reflected in mortgage rates.

The abbreviation LIBOR stands for London Interbank Offered Rate. This rate is published on a daily basis. It was initially a reference rate for loans within the money market and therefore primarily relevant for financial institutions. Since the year 2000, however, the SNB uses the three-month LIBOR to control the Swiss franc with a target range. The development of the LIBOR and the stated target range represent decisive factors for mortgage rates in Switzerland. The most important task of the National Bank is to ensure price stability in Switzerland and also to observe economic development.

The National Bank is making every effort to make its choices comprehensible for the market participants. When defining the target range, the SNB considers the inflation rate (the SNB seeks a moderate inflation rate of around 2%) and the overall economic situation. Market observers are usually able to anticipate a reversal in interest rates and thus, to a certain extent, can make mortgage interest rate forecasts.

The different types of mortgages and mortgage interest rate development

For all types of mortgages, the bank's costs for the procurement of funds are included in the calculation of the respective mortgage. This applies in particular to:

• The fixed-rate mortgage
• The LIBOR mortgage
• The variable-rate mortgage

In the case of fixed-rate mortgages, the interest rate remains the same for the entire term of the mortgage. If, after the borrower has taken out the mortgage, the SNB decides to increase interest rates, the borrower remains unaffected. On the other hand, he can not benefit from falling interest rates either. Whether it is worthwhile to wait for falling interest rates must be decided on a case by case basis and the current economic situation.

In the case of LIBOR mortgages, the LIBOR rate will directly affect the mortgage rate. In addition, the margin will depend on the bank and the borrower. During the term of the mortgage, the mortgage interest rate is adjusted based on the development of the LIBOR rate. The intervals at which this happens can be agreed on between the customer and the bank. Often, intervals of three or six months apply, with the upper limit usually being 12 months. In the event of an increase in mortgage interest rates, a customer is not necessarily bound to the mortgage until the end of the term. Switch options allow you to change to a fixed-rate mortgage. In addition, rate caps offer protection against rising interest rates. These are, however, linked to an additional fee or premium.

A variable-rate mortgage is also constantly being adjusted. However, there is no fixed term here, instead there are periods of notice. This means that every customer has the option of leaving the loan at any time. In contrast to the LIBOR mortgage, the interest rate development of variable-rate mortgages is less transparent because the interest rate is determined by the bank alone.