Home ownership SARON or fixed-rate mortgage: which is currently best?

When choosing between a fixed-rate or a SARON mortgage, the type of mortgage that is more worthwhile for you depends on the market environment – but not only that. Find out in the article which mortgage model is more favorable in the long term according to our forecast, and discover which other factors you should consider alongside costs.

For a long time, inflation figures have been stronger than expected, but the trend now seems to be turning. In June 2023, inflation in Switzerland fell below the two percent mark, which the SNB defines as the upper limit of its inflation target, for the first time since January 2022. Current inflation rates in the USA and the eurozone are also lower than in the first half of the year.

The fall in inflation is likely to prevent the major central banks from raising their key interest rates further in the coming months. However, key interest rates will no doubt remain high for longer than previouasly expected. Cuts to key interest rates will probably not be introduced until the middle of next year at the earliest.

The Swiss National Bank (SNB) last raised key interest rates on 22 June 2023 from 1.5 to 1.75 percent. It decided against a further increase in September 2023. No further key rate hikes are expected for the time being. However, cuts are unlikely until September 2024.

SARON mortgages (money market mortgages): interest rates should remain stable

The interest rate on money market mortgages is likely to remain virtually unchanged at between 2.4 and 2.8 percent in the coming months. It should become more favorable from September 2024 if the SNB lowers its key interest rate. 

Fixed-rate mortgages: no change or a slight increase

Ten-year fixed-rate mortgages currently cost between 2.5 and 3.0 percent in most cases. Over the course of the year, we expect ten-year mortgage rates to fall slightly to around 2.2 to 2.7 percent, despite the anticipated relatively flat development of long-term interest rates.

UBS studies show that until now, money market mortgages were less expensive than fixed-rate mortgages over a longer time horizon. The benefit was 15 to 20 percent of the cumulative interest payments.

According to UBS forecasts, money market financing is still likely to be the more favorable financing option over a ten-year term compared with a ten-year fixed-rate mortgage. We estimate the interest cost advantage of a money market mortgage to be just under one-fifth of the cumulative interest payments on a ten-year fixed-rate mortgage over the entire term. If, contrary to our forecasts, higher short-term interest rates materialize in line with current market expectations, the cost advantage of a money market mortgage will no doubt shrink to around five percent. If short-term interest rates were to rise persistently due to serious concerns about inflation, a fixed-rate mortgage would be the more advantageous option over a ten-year term.

The choice of the best mortgage financing depends on individual factors. The first question to answer is what type of person you are. The more security conscious the borrower, the more advisable a fixed-rate mortgage with a long term.

There are also good reasons for opting for a money market mortgage. Choosing a short term allows you to remain flexible. If you are suddenly tempted by a job offer abroad or if there is a change in your family situation (divorce, children moving out, etc.), you can sell your home in the short term without incurring an early repayment penalty.

In addition, mortgage borrowers are free to take action regularly if interest rates change and can switch to a fixed-rate mortgage if necessary. But to benefit, they must keep up to date with market conditions. This is something that requires a certain amount of interest and expertise.

Whatever your situation, it may be worth spreading the fixed interest rate over different terms. For example, anyone who had to renew their entire mortgage at the beginning of March 2023 was exposed to particularly high interest rates for fixed-rate mortgages. On the other hand, homebuyers who had financed their residential property by taking out several mortgages with different terms only had to extend one tranche at relatively high conditions in March.

Security doesn't come for free. Money market financing is still likely to be the more favorable financing option over a ten-year term compared with a ten-year fixed-rate mortgage, despite the current inverted interest rate curve. However, the extent of this cost advantage depends very much on inflation. Mortgage costs are an important factor when deciding which mortgage model is right for you – but your personal preferences and financial situation should also play a role in the decision. That’s why it pays to seek professional advice from UBS. We will make sure that you consider all the important points and determine a strategy that suits you.