How to minimize your mortgage interest
Having a healthy deposit will earn you a lower interest rate, but too much won't save you a great deal more. Switching bank can help. These tips from Comparis mortgage specialist HypoPlus will help you negotiate the best rate.
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A bigger deposit is not always better
Mortgage lenders give people with a good credit rating a lower interest rate. Borrowers are seen as being more creditworthy than average if they supply a higher deposit than the required minimum of 20% of the property value, for example.
Optimum loan-to-value ratio no more than 2/3 of value
However, an analysis by HypoPlus, the Comparis Group mortgage specialist, shows that lenders more or less stop granting any additional interest rate discounts once the loan-to-value ratio is less than 65%. It is therefore hardly worth putting in as much deposit as you can when buying a home.
The optimum loan ratio is no more than two-thirds of the property value. In this case, the mortgage interest rate is reduced by up to 25 basis points (one basis point equals 0.01 percentage point).
First mortgage is key
The fact that more deposit does not necessarily mean a lower rate is due to the high collateral required for what are referred to as first mortgages. These are available up to a loan-to-value ratio of 65%. In the case of foreclosure, the sale price of the property is usually sufficient to cover the first mortgage.
This means that an even lower loan-to-value ratio offers the mortgage lender little in the way of extra collateral, so the borrower is unlikely to be given an additional discount on their interest rate.
Switching banks can pay off
The HypoPlus data analysis also shows that changing your principal bank to a cheaper lender will lower your interest rate by a further 5 to 10 basis points on average.
Transferring your salary account and other assets accounting for around 10% or more of the amount of your mortgage to your mortgage lender further increases your chances of the maximum interest discount. This is because the presence of additional assets signals to your lender that you have not borrowed right up to your limit. The credit risk is thus lower.
Affordability has little effect on your mortgage rate
A residential property is considered affordable if the monthly costs do not exceed one third of the borrower's household income. However, the HypoPlus study indicates that affordability has little influence on mortgage interest rates. An excellent affordability level of around 18% of income (the usual is 33%) reduces the benchmark interest rate by only 5 basis points at best.
If your mortgage is with an insurance company, there is another way to save. Taking out life insurance with the mortgage lender will be rewarded with a reduction of 3 basis points on average. All of the different reductions apply cumulatively.
See how much you could save
This illustration is based on a benchmark interest rate of 1.16% for a 10-year fixed-rate mortgage (as at 12 July 2021) and a mortgage for a property valued at 1,000,000 francs.
| Interest rate [in percent] | Cost / year [absolute in CHF] | |
|---|---|---|
| Starting point: loan of 80% from your principal bank | 1.16 | 9,280 |
| After reducing the loan-to-value ratio to 65% | 0.91 | 6,067 |
| Transfer of bank accounts incl. additional assets to the lender | 0.81 | 5,400 |
| Above-average affordability rating | 0.76 | 5,067 |
| Total discount/year | 0.4 | 4,213 |
| Total discount/mortgage term | 42,130 |
Be careful not to repay too much
A final tip is to avoid paying off too much of your mortgage. Otherwise, you may not have enough cash after retirement to maintain your usual standard of living. In addition, it is often difficult to increase the mortgage for a few years before and after retirement.