Most banks advise their borrowers to split their mortgage into different tranches. Comparis explains what this means and what to watch out for.
If you are currently in the process of organizing a mortgage on a property, you have probably already encountered the term “tranche”, commonly used in Switzerland to refer to a portion of a mortgage. Mortgages can be split into two or more tranches, each having different repayment terms. One of the advantages of splitting a mortgage in this way is that borrowers don't have to renew their entire mortgage at once at the end of the term, and can therefore respond more flexibly to interest rate fluctuations or changes in their personal circumstances. On the other hand, problems may arise if a borrower wishes to switch to a different lender.
Possible problems renewing a mortgage with multiple tranches
If all tranches end within twelve months of each other, the whole mortgage can usually be transferred to a new lender without too much trouble. The task becomes problematic if the tranches end on dates more than twelve months apart. In this case, it may well be difficult – even impossible – to switch to a different lender. The reason for this is that most lenders are not prepared to take on just an individual tranche, as it involves considerable administrative effort (e.g. splitting the mortgage note, creating a promise to pay) on their part. Furthermore, the risk is greater for the lender that only takes on individual portions – theirs becomes the “second-rank” mortgage – than for the current lender.
To ensure that you are nevertheless able to switch lenders in the future, you have the following option: renew the maturing tranche(s) so that all tranches mature as close together as possible or within a maximum of twelve months of each other.
Example: You took out a mortgage on a house in 2013 for 800,000 francs and split it into two tranches of 400,000 francs each. The first tranche has a term of five years, the second a term of ten years. In order to be able to redeem the entire mortgage at the end of the ten-year tranche, you would need to extend your first tranche, due to mature in 2018, by five additional years. This means that both tranches would mature in 2023 and you would be able to switch the mortgage to a different lender.
Tip: To ensure you have enough time to organize the next mortgage, we advise you to contact an independent mortgage adviser twelve months before the mortgage is due to end. Activate a termination reminder so that you don’t miss the deadline for giving notice on your current mortgage.
Pros and cons of splitting a mortgage
- Different tranches with different repayment terms allow borrowers to avoid having to renew the entire mortgage at once.
- Advancements on inheritance, gifts or events such as maturity of a life insurance policy can be taken into account when planning.
- Customers with split mortgages wishing to switch lender at the end of their first tranche may not find a bank that's willing to lend to them. Lenders are rarely interested in only taking on a single tranche.
- The portions of the mortgage that are first to come to an end usually have to be renewed with the same lender, who might exploit this by offering less favourable conditions.
- Another disadvantage of splitting is that renewing a mortgage in stages makes budgeting more complicated, so it's more difficult to plan in the long term than if you have a single mortgage with no splits.
You can read more about what else to consider when renewing a mortgage here.
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