Changing your mortgage can be profitable

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If mortgage interest rates remain stable or rising for a long time, mortgage holders appreciate the idea of having a fixed-rate mortgage. However, if the general interest rate falls sharply, the thought of switching soon seems tempting, especially if another type of mortgage offers better terms and conditions. Depending on the remaining term, contractual interest rates and current mortgage rates, it is sometimes worthwhile to change prematurely. Basically, changing from variable mortgages is the easiest, changing from a LIBOR mortgage is a little more difficult and switching from a fixed mortgage must be carefully considered as high penalties can sometimes be incurred.

Switching a mortgage: How different types of mortgage vary

Switching a mortgage is connected with an early release, and may become quite expensive. Depending on the type of mortgage, penalties are determined by different factors.

  • Switching from a fixed-rate mortgage can become expensive

Switching from a fixed-rate mortgage is often the most difficult. While mortgage holders usually benefit from their fixed terms and interest rates, the downside of this type of mortgage becomes apparent when they make a change request. If the mortgage is prematurely redeemed, a penalty payment will be levied in the form of a prepayment penalty. These penalties can be very high depending on the contract and the remaining time of the mortgage. In this case, therefore, it must be precisely calculated whether the switch actually makes financial sense and if the new mortgage offer still seems as tempting. The amount of the penalty is mainly calculated by the interest payments which would have been incurred in the remaining term, processing figures and - when switching to a rival bank - additional penalty fees. For this reason, penalties of several tens of thousands of Swiss francs can be quickly reached, making the potential change unattractive. The decision should only be made after closely examining the conditions stipulated by the contract.

  • A Libor mortgage can be prematurely terminated

With Libor mortgages, it is possible to end them prematurely without incurring any penalty payments. This is due to the rather short-term nature of this type of mortgage. Depending on the bank, type of mortgage and contract, however, there may also be a demand for penalty payments. This is also down to the fine details of the contract; terms and conditions and so on. However, any penalties are unlikely to be anything like as high as those incurred by switching from a fixed-rate mortgage.

  • Switching from a variable-rate mortgage

The simplest type of mortgage to change is the variable-rate mortgage as flexible conditions and deadlines are set a priori, which makes the termination of the mortgage very straightforward. In compliance with the contractually agreed deadline, this type of mortgage can generally be replaced and changed at any time.

The other two types of mortgage are also influenced by developments of the financial market. However, the interest rate composition here is less transparent and the banks are under no obligation to adjust the mortgage directly to the conditions of the money market. Accordingly, banks have the opportunity to cushion any interest rate increases and not to implement them one-to-one in the variable-rate mortgages.

To find out how the interest rates of various types of mortgages have performed in the past, you can use our interactive graphic to track the historical development of interest rates.

When you really need to change your mortgage

Switching your mortgage early because of better conditions is only worthwhile if the potential savings under the new conditions is actually higher than the penalty fees. This potential is the result of the interest rate difference between the two mortgages. In principle, the advice is that if the interest difference between the existing mortgage and the market interest rate is at least 1.5 percent and the remaining time is at least one year, the exit and exchange can be worthwhile. Depending on the canton, prepayment claims can also be made with regard to tax, which must be included in the calculation.

When switching mortgages, competent advice always pays off. At MoneyPark, we offer independent advice in our branches, where we can discuss individual conditions tailored to your needs and help you find the best mortgage in Switzerland.

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