Fixed-rate mortages: Living favorably for the long term and saving interest

 Fixed-rate mortages are the right choice for all customers who want to budget smartly and plan for their own home in the longer term. In order to profit from extremely low interest rates in the future, longer terms – e.g. 10 years – are popular. For this, the following should be noted.

Today it is hard to imagine: In 2008, 10-year fixed-rate mortgages cost around 4.5 percent annual interest. Or expressed in figures: Whoever accepted a mortage for CHF 1 million had to pay an annual interest charge of CHF 45,000. Inasmuch as interest rates have fallen sucessively since the 2008 financial crisis, the same financing costs only around CHF 15,000 today! Terms of fixed-rate mortgages are still highly attractive: The 10-year mortgage on the homegate.ch online mortgage currently costs only about 1.5 percent. There are even 2-year fixed-rate mortgages starting from about 0.65 percent (as of January 2018 interest rates).

 

Fixed mortgages: Good reasons

What speaks for fixed mortgges? Basically, fixed mortgages are suitable for security-oriented customers. For example, for a family that earlier planned to live in its own home for a brief period, but wants to remain longer. The interest rate remains fixed throughout the term. If the situation changes – if monetary policy and interest rates suddenly go in a different direction – the family still pays the same interest until the end of the contract. It does not have to worry about interest rate increases.

The disadvantage: If financing during the term becomes more favorable, the customer cannot benefit. However, there are two important arguments in favor of fixed-rate mortgages. First, market interest rates have fallen so low that another slide down hardly seems possible. Second, the current interest-rate curve is relatively flat.

 

Fixed-rate mortgages – how are the costs figured?

For one thing, the interest premium for longer maturities is not as much as it used to be. Nevertheless, the customer must be aware that more security, i.e. a longer contract period, costs more interest (difference compared to a term of 2 or 5 years). On the other hand, if one is prepared to take risks, Libor mortgages are always an option. Although these products are associated with interest rate fluctuations, calculated over several years interest costs are generally lower than those of fixed-rate mortgages.

It is difficult to assess when which mortgage with which term should be concluded. Interest rate forecasts are a difficult business. Decisive for the total costs during the term is to be sure the entry point is at a comparatively low level. In the end, it just takes a bit of luck.

 

Can contracts be cancelled?

Especially with longer terms one sees much later whether he is on the winning or losing side. Strictly speaking, fixed-rate mortgages are not cancellable – neither by the bank nor the mortgage customer. What happens if one day living conditions change (different job, divorce, unemployment, etc.)? and one still wants to terminate If one wants to withdraw from the contract as a result of divorce, for example, he must first find out about the modalities and costs of an extraordinary termination. Moreover, those who have contractually fixed a more expensive fixed-rate mortgage in the past cannot „simply“ switch to a currently cheaper product.

The amount of the so-called pre-payment penalty or „penalty,“ as it is simply called, depends on the difference between the agreed mortgage interest and the interest rate on the money or capital market that can be achieved for the remaining term. Example of a CHF 500,000 mortgage: With 3% mortage interest, a remaining term of three years and a reinvestment interest of just 1%, a customer must pay three times a 2% interest rate. In this case, the compensation in favor of the bank would amount to a total of CHF 30,000.

 

«The small print»

Before signing, every mortgage customer is well advised to read the contract and find out what the termination conditions would be. Generally, one gets off lightly with Libor mortgages due to their short-term character, but depending on the contract partner and model one must fear withdrawl costs here – for the evaded bank margin or depending on a pre-payment penalty, if the Libor mortgage was also bound to a longer contract duration.

 

Tip: In order to distribute the opportunities and risks better and lessen the possibility of an unfavorable case, splitting is usually worthwhile. The customer can combine longer and shorter terms. A composite of fixed and Libor mortages is often worthwhile.