What is a variable-rate mortgage?

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What is a variable-rate mortgage and what should customers keep in mind?

While 20 years ago the variable-rate mortgage was the most sought-after mortgage type, its market share today is only around 2%. Up to late 2008, the variable rate was subject to political influence because it provided the basis for the calculation of the rental rate. For this reason, the variable rate was often artificially kept low. Nowadays, the calculation of the rental rate is based on the refinancing rate of SNB, which is why banks can arbitrarily set the rate for variable-rate mortgages. However, the variable rate is still subject to adjustments in the capital markets because variable-rate mortgages are often refinanced with savings. Thus, if the rates for variable-rate mortgages rise, the rates on bank accounts are likely to rise too, with a certain delay (and vice versa).

The actual composition of the variable rate is non-transparent compared to a LIBOR mortgage. Quite often, the variable-rate mortgage is too expensive during periods of low interest rates. Furthermore, the variable mortgage rate is usually the same for any customer, i.e. the creditworthiness of the customer does not matter as contrasted with fixed mortgage rates or LIBOR mortgage rates.

How does a variable-rate mortgage work?

A variable-rate mortgage often does not have a fixed duration but is usually subject to a cancellation period of three to six months. Most financial institutes allow customers with a variable-rate mortgage to immediately change their type of mortgage, e.g. into a fixed-rate mortgage or a LIBOR mortgage. In this case, the bank waives the cancellation period or the customer concludes a forward mortgage. If the replacement of the mortgage is concluded with a third-party institute, the current bank usually insists on the cancellation period.

Moreover, it is possible to amortize (pay back) even large amounts of the mortgage at any time. Contrary to fixed-rate mortgages and LIBOR mortgages, there is no minimum amount regarding tranches, which means that the customer can have tranches with less than CHF 100'000.

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PROs of variable-rate mortgages

  • High flexibility with regards to amortization
  • Since the customer can immediately change the type of mortgage, a variable-rate mortgage is useful when the level of interest rates is falling
  • It is possible to have very small tranches

CONs of variable-rate mortgages

  • Composition of the interest rate is not transparent
  • Due to the variable rate, budgeting is not possible
  • Currently much more expensive than short-term fixed-rate mortgages

Current mortgage rates

LIBOR mortgage from 0.56%
Fixed-rate 10 years from 0.93%
Fixed-rate 5 years from 0.58%

The displayed interest rates are the best rates currently available. Your personal interest rates may vary depending on LTV, affordability, mortgage amount and the location of the property.