When a mortgage is about to end, it’s time to consider how to refinance it. Homeowners now have two options to choose from: extending or switching. HypoPlus, the mortgage arm of the Comparis group, describes the differences and explains why it's usually worth switching to a different lender.
- Difference between extending and switching
- When should I think about extending or switching?
- Pros and cons of extending a mortgage
- Pros and cons of switching a mortgage
- Significant potential savings
- Extending and switching: a good opportunity to increase your mortgage
Difference between extending and switching
One option for refinancing an expiring mortgage is to extend it. This involves entering into a new mortgage agreement with your current lender based on the latest rates and conditions. The second option is to switch to a different lender and renegotiate the mortgage agreement.
When should I think about extending or switching?
Start monitoring the market around 24 months before your mortgage term is due to end. The Comparis Mortgage Barometer or Comparis interest rate forecasts can provide some insights here. Arrange an appointment with an independent mortgage professional around 15 to 18 months before the end of the mortgage. Don't postpone the matter of remortgaging until a few weeks before the end of the term. Time will be on the lender's side instead of yours – which will inevitably result in you being offered unattractive interest rates. Some lenders let you secure your mortgage early – up to two years in advance. Refinancing up to 12 months advance often requires no surcharge.
Pros and cons of extending a mortgage
- Less administrative work
Staying with your current lender is much simpler from an administrative point of view. You already have the necessary paperwork relating to your property. You just need to submit documents like your tax return and salary certificate, which must be up to date.
- Small mortgage balance
If you have repaid most of your mortgage, request an interest rate offer from your current lender. The bank will probably offer you its indicative rate in the first round of negotiations. This is on average significantly higher than the best achievable rate on the market. Don't settle for this initial offer – keep negotiating. A reduction of around 0.1-0.25% is certainly within reach.
- Multiple tranches
If your mortgage comprises two or more tranches, you may be negotiating from a weaker position. The situation is especially problematic if the second tranche is not due to end in the next 24 months. There may well be reasons to split your mortgage into tranches, but in most cases, this primarily works in favour of the banks, as it ties in customers for the long term. One solution could be to split the mortgage certificate (“Schuldbrief”). The easiest way to do this is to leave the maturing tranche with the current lender and to align the due date of the new agreement with that of the second tranche. When both mature, you can easily switch to a more attractive lender.
Pros and cons of switching a mortgage
- Exploiting the market
The end of a mortgage deal provides an excellent opportunity to use the market to your advantage. If you negotiate with a range of lenders, or have someone negotiate for you, you can generally secure very attractive mortgage rates for the long term.
- More administrative work
Switching to a different lender means you have to go through the full credit check process. You have to submit all property-related documentation as well as information on your income and assets. This administrative effort is worth it, because the difference between the indicative interest rate and the best negotiated rate is enormous.
Significant potential savings
The gap between the indicative rate offered as standard by lenders and the best negotiated rate is very wide (see graphic below). The graphic illustrates the huge savings potential available for people coming to the end of their mortgage term – potential that is still not being sufficiently exploited. This year, the average interest rate difference for a ten-year mortgage is 0.53% per year.
Assuming a mortgage amount of 650,000 francs and a ten-year repayment term, an interest rate difference of 0.53% per year represents a potential saving of up to 34,000 francs in total. The very cheapest mortgage rate is not available to all borrowers. Lenders calculate the rate on the basis of individual affordability and the loan-to-value ratio. They also take into account factors such as the type of property, geographical location and residual assets.
Data collected by HypoPlus, the mortgage experts of Comparis, shows that it is possible to achieve, on average, an interest rate that is some 0.30% more favourable – which could save you a few thousand francs annually.
Extending and switching: a good opportunity to increase your mortgage
Refinancing your mortgage is the perfect time to review the mortgage amount. If you are planning renovation work, for example, you can increase your mortgage by, say, 30,000 francs for a new bathroom and/or 12,000 francs for new windows. Any mortgage increase must not exceed the limit of the loan-to-value ratio and must meet affordability rules.
Tip: work that is considered "value-preserving" should be carried out tax-efficiently over multiple years or completed within one year if the investment is small. It is difficult to increase a mortgage of, say, 650,000 francs by 20,000 francs during the mortgage term without having to accept less-than-favourable rates and conditions. Therefore, it is always a good idea to plan renovations and alteration work well in advance.