Mortgage rates are set to remain attractive in 2021. If mortgage borrowers know how to capitalize on interest rate fluctuations and competition between lenders, they can save several thousand francs.
The outbreak of the coronavirus pandemic in March 2020 caused benchmark rates for ten-year fixed-rate mortgages to increase to 1.20% from their all-time low of 0.98%. Since then, the rates of the most popular mortgage in Switzerland have hovered around the 1-1.15% mark. The benchmark rate is currently 1.06% (as at 16 December 2020).
HypoPlus, the mortgage specialists of the Comparis group, together with Comparis financial expert Frédéric Papp predict the following interest rates for fixed-rate mortgages in 2021:
|Benchmark rate (15.12.2020)*||Rates until December 2021|
|10-year fixed-rate mortgage||1.06%||0.9-1.2%|
|5-year fixed-rate mortgage||0.9%||0.7-1%|
*Source: HypoPlus, mortgage experts of the Comparis group
Rate rises and inflation surge unlikely
The European Central Bank (ECB) and the European Union have decided to offer billions in emergency loans and additional central bank money in order to shore up the economy. Against this background, rate increases and a strong surge in inflation seem unlikely. If a worldwide vaccination campaign succeeds in containing the coronavirus pandemic, the global economy would gather momentum again. “This could trigger hikes in energy prices, which would then, in fact, lead to a slight increase in inflation rates,” says Comparis expert Papp.
If credence is given to the projections of the ECB, inflation is set to rise to 1% in 2021 and to 1.3% in 2022 in the euro area.
What does this mean for mortgage borrowers?
Mortgage borrowers would nevertheless be well advised to keep a close eye on the mortgage market if they wish to obtain the best possible deal:
Look out for “special offers” on selected repayment terms
There are always phases in which lenders offer considerably better rates for particular terms. Independent mortgage brokers have close connections with mortgage lenders and can help to uncover these deals.
Remember: insurance companies and pension funds tend to offer the best rates for long repayment terms, while banks generally have more favourable rates for short and medium terms.
Make the most of fluctuations in swap rates
Banks also refinance mortgages on the international capital market via the swap market. Falling swap rates make refinancing cheaper. Banks can pass on a portion of the cost benefits in the form of cheaper mortgage rates. The following examples illustrate how changes in swap rates can affect mortgage rates:
|Date||10-year CHF swap rate||Change in swap rate||Change in 10-year fixed-rate mortgage||Benchmark rate for 10-year fixed-rate mortgage1||Interest cost per year for 10-year fixed-rate mortgage (CHF 750,000)||Change in annual interest cost|
1Time lag of a few days possible
“The uncertainties relating to the impact of the coronavirus pandemic on the economy and monetary policy will continue to fuel anxiety on the capital markets in 2021. Changes of +/- 30 basis points on the ten-year swap rate are perfectly possible,” says Papp.
With interest rates currently so low, mortgages represent an attractive asset class for banks, insurance companies and pension funds. This has intensified competition and put pressure on mortgage rates.
In 2016, the average mortgage rate offered to HypoPlus customers for a ten-year fixed-rate mortgage was 1.2%. Nowadays, mortgage rates of less than 1% are the norm and can fall as low as 0.61%. Comparis financial expert Papp believes that the lower rates can be explained to some extent by decreased swap rates.
Two factors are basically driving competition: the first is the fact that banks, chiefly the regional, Raffeisen and cantonal banks, generate most of their income from mortgage business. However, the interest margin has decreased over the years. The only way to compensate for this is to expand mortgage activities.
The second is the fact that persistent negative interest rates are drawing more and more investors – like insurers and pension funds – into the asset class of mortgages.
Interest rates converging
While ten-year fixed-rate mortgages are available from as little as 0.61%, rates for five-year fixes start at 0.54%, as data from HypoPlus shows. With the difference amounting to just 7 basis points, the interest curve is extremely flat. Locking in interest rates for 10 years is cheaper than ever, when compared with shorter terms.
Five-year fixed-rate mortgages are available at similar rates to those of Libor or Saron mortgages.
Don’t settle for the first best interest rate offered
The difference between the indicative or benchmark rates advertised and the best negotiated rates remains significant. Borrowers should never accept the first best rate offered to them by their bank. Here is an illustration:
|Best rate negotiated by HypoPlus:||0.61%|
|Rate difference per year:||0.45%|
|Saving in francs per year (0.45% of 850,000):||3,825 francs|
|Saving in francs over the entire term:||38,250 francs|
Not everyone is offered these rates. Data compiled by HypoPlus shows that interest rate differences of 0.2-0.3% are certainly within the realms of possibility. Calculated on the basis of the mortgage amount and the entire term, mortgage borrowers can save almost 13,000 francs all together, or 1,275 francs per year, on a mortgage that is “only” 0.15% cheaper.
The benchmark rate information used in the Comparis/HypoPlus interest rate forecast is based on the benchmark rates of some 50 lenders. They are updated daily and published in the mortgage rate overview.