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The Libor will be discontinued at the end of 2021 and the Saron will take its place. The Saron is significant for private individuals, as it also determines the price of “money market” mortgages. Currently, most mortgage lenders are still selling money market mortgages under the name of “Libor mortgage”. In future, Libor mortgages will be called Saron mortgages. Some banks are already offering Saron mortgages.
Why is the Libor being phased out?
The Libor has been discredited due to its susceptibility to manipulation. In 2011, for instance, it was revealed that various banks had been charging excessive interest rates in collusion with each other in order to rig the benchmark rate. The Swiss National Bank (SNB) tasked the National Working Group on Swiss Franc Reference Rates (NWG) with finding a replacement for the Libor. It had already advised banks to use the Saron as the new reference interest rate at the end of 2018.
What is the Saron?
Saron stands for Swiss Average Rate Overnight. It is the interest rate charged by the SNB to banks and insurance companies for investments of excess liquidity or for short-term borrowing. Compared to the Libor, the Saron is more transparent because it is based on actual transactions. It is also considered more robust than its predecessor as, unlike the Libor, the loans to which it applies have securities deposited as collateral.
How is the Saron calculated?
Unlike the Libor, the Saron is purely an overnight rate. However, money market mortgages require rates for longer terms such as one, three or six months. For this scenario, the NWG devised the Saron Compound rate. SIX publishes the current interest rate on a daily basis.
Will my existing Libor mortgage automatically become a Saron mortgage?
Some current Libor mortgages will automatically be converted to Saron mortgages. This depends on your mortgage agreement. Some banks have an automatic conversion process in place. Others have stopped issuing Libor mortgages with terms going beyond the end of the Libor.
What is the difference between a Saron mortgage and a Libor mortgage?
In the current low interest rate environment, both Libor and Saron rates are well below zero. Banks are holding their interest rates at zero. This means that customers are currently only paying the bank's margin on both Libor and Saron mortgages. It can be assumed that the Saron will have to fall lower than the Libor because it is backed by securities as collateral against the risk of default in times of crisis. Historically, the Libor has also proven much more volatile than the Saron. SIX, the benchmark administrator of the Saron rate, has listed five more differences.
Can I take out a Saron mortgage now?
Yes, some banks, such as Raiffeisen and UBS, are already offering Saron mortgages. Almost all the other banks will follow in the summer or autumn. The transition will be complete by the end of the year. Compare your interest rates and request a quote now.
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