Saron or fixed-rate mortgage? A comparison
Various banks offer Saron mortgages. Comparis explains the main differences between a Saron and fixed-rate mortgages and when to choose which.
20.11.2022
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1. What is the difference between a Saron and fixed-rate mortgage?
Term to maturity: a Saron mortgage is a money market mortgage. It does not have a fixed term. Fixed-rate mortgages, on the other hand, have terms of between one and 25 years.
Planning and budgeting: the rate on a Saron mortgage is usually adjusted quarterly. The contractually agreed rate on a fixed-rate mortgage applies for the entire term. This lets you plan and budgetmore effectively.
Early repayment charge: the lender will charge an early repayment penalty if the borrower pays off the mortgage before it matures. The charge is usually lower for Saron mortgages than it is for a fixed-rate mortgage. Certain Saron mortgage providers will let you pay off a part of your mortgage early without charging an early repayment penalty. That is why you need to be careful when choosing a lender.
Vendor lock-in: as a rule, and like fixed-rate mortgages, the terms and conditions of a Saron mortgage loan are specified in a contract. The loan term usually runs for three years. As a borrower, you can convert your Saron mortgage into a fixed-rate mortgage during this period if you're worried about interest rates rising , for example. However, you must stay with the same lender. Switching lender is usually only possible if you pay an early repayment penalty.
Administrative costs: for the lender, a Saron mortgage is costlier to manage than a fixed-rate mortgage. These costs are usually reflected in the higher margins charged by Saron mortgage lenders.
Pros and cons of Saron and fixed-rate mortgages at a glance
Here are the biggest pluses and minuses of Saron and fixed-rate mortgages:
| Pros | Cons | |
|---|---|---|
| Saron mortgage |
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| Fixed-rate mortgage |
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2. Saron vs fixed-rate mortgage: what is cheaper?
Whether a Saron mortgage or a fixed-rate mortgage will cost you less depends on future interest rates. The going rate for a three-year fixed-rate mortgage is 2.4%, which is around 1.5 percentage points more than the Saron mortgage rate of 0.9% (reference rates as at 18 November 2022).
With a fixed-rate mortgage, you can plan with certainty for the next three years. If you expect interest rates to rise in the coming years, we recommend the fixed-rate option.
Stay abreast of interest rate forecasts and compare the current mortgage rates.
3. Why do mortgage rates even themselves out?
Short-term tracker mortgages are generally cheaper than fixed-rate mortgages: the shorter the term, the lower the mortgage rate. The yield curve is very flat right now. This means that long-term mortgages are only slightly more expensive than short-term ones.
High yields on mortgage rates reflect high investor inflation expectations. Mortgage providers' pricing policies also affect yield curves. The interest on ten-year fixed-rate mortgages, for example, will see a sharper drop relative to mortgages with other terms to maturity if more lenders offer ten-year mortgages.
4. When does a Saron mortgage make sense?
If you expect interest rates to fall, you should choose a Saron mortgage over a fixed-rate mortgage.
5. When does a long-term fixed-rate mortgage make sense?
If you expect interest rates to rise and stay high for several years, it is recommended that you lock in a fixed interest rate for several years.
6. What if I overpay on my mortgage?
Let's say you need to pay off a mortgage loan of CHF 750,000. You are also expecting a payment of CHF 250,000 in three years' time. You have earmarked this sum to pay down your mortgage.
In this case, you would be well advised to take out a separate three-year fixed-rate or Saron mortgage for the CHF 250,000. You can use a ten-year fixed-rate mortgage for the remaining 500,000 francs.
This article was first published on 12.11.2020
