Thanks to continuing low interest rates, it's a great time to consider taking out or refinancing a mortgage. You just need to remember a few key points in order to avoid unpleasant surprises and save money.
1. Forget about interest rate forecasts
Avoid getting caught up in trying to predict interest rate changes yourself. Even major banks and seasoned experts struggle to forecast interest rate developments with any accuracy. It's just not worth waiting for the “perfect” time to take out a mortgage. 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. Get your sums right
No-one wants to be in debt. But simply going for the lowest possible interest rate (or loan-to-value ratio) is not necessarily the best approach. This is because the size of the mortgage affects not just how much interest you pay, but also what your tax bill will look like. Remember that mortgage interest is tax deductible, and your assets are reduced by the amount of the mortgage. So although paying off your mortgage in full means you avoid paying mortgage interest, you will still have higher income tax to pay based on the imputed rental value of your property.
Don't forget that owning a home also often comes with a host of unforeseen expenses, such as new furniture, changes in transport requirements (e.g. a second car), renovation and repairs. Consequently, 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.
3. Be careful when splitting your mortgage
Lenders often suggest splitting a mortgage across multiple 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.
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.
In short, you should only split your mortgage if you know you can pay off the expiring portion before the deal ends. This will give you greater leverage if you wish to negotiate with the lender.
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. In these circumstances, you can't expect to switch immediately to a cheaper lender. So take a moment to check the notice period in your agreement and set yourself a reminder in plenty of time before the cancellation deadline.
5. Compare before you sign
Whenever you purchase a product or service, it’s pretty standard to shop around first to compare prices and value. But when it comes to mortgages, customers often seem prepared to settle on the first good deal they find, even though the large sums of money involved make a comparison of conditions especially worthwhile. In fact, there are very few financial products that merit a comparison more than mortgages. Experience shows that 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!
You can find other useful tips in our Mortgage Guide: