What to consider when taking out a mortgage@Model.TitleTagString>
Taking out a mortgage
Financing a new home involves making a considerable number of important decisions, and you need to reflect carefully if you want to be happy with your choice in the long term. Below is a list of key points to consider.
1. Forget about interest rate forecasts
“The art of prophecy is very difficult, especially with respect to the future”, said Mark Twain. The same holds true for mortgage rates. Few banks or experts have managed to forecast interest rate developments with any accuracy during the past five years.
If you think that interest rates will remain low for a long time and so choose a short-term mortgage to get a “better deal” – be aware that this is already factored into long-term maturities as well. Lenders also expect interest rates to remain low for the foreseeable future. After all, this is the reason why ten-year fixed-rate mortgages are currently available at 1 per cent (autumn 2016) – instead of 3.5 or 4.5 per cent as they were up until quite recently.
Tip: If you don't want to concern yourself with interest rates, can't afford any rate increases or simply wish to avoid them at all costs, you should take advantage of the extremely favourable mortgage rates available at the moment and lock yourself in for the longer term.
2. Be careful when splitting your mortgage
- Lenders often suggest splitting a mortgage across multiple accounts with different terms. Their reasoning is that if customers don’t split, the entire mortgage must be refinanced under less favourable conditions at the end of the term – depending on interest rate changes, of course. Minimizing risk in this way may be desirable – but it comes at a price.
- For example, if you split your mortgage into two portions, one on a five-year and the other on a ten-year term, you will have to remortgage in five years’ time. At this point, your bank or lender will offer you a deal. Unfortunately, you are then forced to accept this offer whether you like it or not, even if it is considerably worse than other deals on the market. This is because it is not financially feasible to split your mortgage across two lenders.
- Clients who are able to redeem the maturing mortgage are in a better position to negotiate – they can indicate that they will simply pay it off if they don't get a good offer. Your client advisor, who has your mortgage in his portfolio, prefers a sizeable mortgage. He also wants you to have your assets with him. Threatening to reduce your assets and your mortgage at the same time will be inconvenient for the advisor, who will then be more willing to negotiate.
Tip: Only split your mortgage if you are able to redeem the expiring portion when the deal ends.
3. Don't borrow too little
- Buying a house involves considerable costs, some of them unexpected or not budgeted. You might need money for new furniture, for instance, or because of changing transport requirements (e.g. a second car) as well as modifications, renovations and repair of the property.
Tip: Once you have bought your property and paid the associated costs, you are advised to keep aside a cash reserve of at least five per cent of the property's value that you can access if need be.
4. Don't forget to cancel your (fixed-rate!) mortgage
- Even though your fixed-rate deal expires on a set date, you still need to cancel it. If you do not act, your fixed-rate mortgage will switch, in most cases, to a (more expensive) variable-rate mortgage when it expires. Also, you won't be able to switch to a cheaper lender straight away and will have to adhere to the cancellation period of the variable-rate mortgage.
Tip: Take a moment to check the notice period in your agreement and make a note of it in your diary. Alternatively, let us send you a cancellation reminder by e-mail. More
5. Don’t take out a mortgage before comparing terms
- Choosing the first deal your mortgage advisor offers for your mortgage or renewal may turn out to be expensive.
- We have observed countless cases in which clients were able to save considerable sums of money by comparing offers – whether via comparis.ch or directly on the market. In many cases, with some comparing and judicious negotiating (or having someone negotiate on their behalf), a mortgage customer in Switzerland can typically save between 5,000 and 20,000 francs on their mortgage!
Tip: Consider using the expertise of HypoPlus, a partner service of comparis.ch, to help you negotiate your mortgage. HypoPlus works with over 50 lenders to secure the best terms for you. It's easy, free and there is no obligation.
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