Getting the right mix

A balanced mortgage strategy helps you enjoy your home without worry.

December 14, 2010, Jürg Zulliger (text) and Paul D. Scott (picture)

Mortgages are like investments - to diversify the risk, never put all your eggs in one basket. No sensible investor would put all their money into a single security. Oliver Diener, a mortgage specialist at UBS, comments: "With a mortgage of 600,000 francs, it's a good idea to split it into three equal parts of 200,000 francs each."

Combining fixed-rate and Libor mortgages
Home-owners can freely combine fixed-rate mortgages with differing maturities and Libor mortgages. Libor mortgages, which are based on the Libor rate on the money markets, have become much more popular during the period of low interest rates seen over the last few years. Their interest rate is modified every three or six months to match the market (3-month or 6-month Libor).

In a normal interest-rate environment, Libor mortgages with short maturities are always cheaper than fixed-rate mortgages with long maturities. At the same time, fixed-rate mortgages ensure budget certainty over their lifetimes. It is also possible to include an interest cap in Libor mortgages, as a way of protecting against big rises in interest rates. It is quite permissible to include a Libor mortgage without a cap in a well-diversified mortgage mix. In this case, the protection against rising interest rates is provided by the combination of different mortgages and maturities.

Step by step to the right strategy
A balanced mortgage mix generally makes sense, even given the low interest rates of today. Spreading refinancing decisions along a time axis eliminates the risk of having to roll over the entire mortgage at once in a high interest rate environment. So the trick is to find the mix that matches your personal profile and is in line with the current interest situation and the forecasts.

The starting point is the personal profile. The 'stable' profile is the right choice for people who like stable, calculable budgets, who only just meet the viability requirements (interest costs should not account for more than one-third of gross income), and who have little knowledge of financial and interest markets. This variant includes a high proportion of fixed-rate mortgages. On the other hand, people who have no problem with fluctuating interest rates, who comfortably surpass the viability rules (interest expenses account for less than one-quarter of gross income), and who have experience in the financial and interest markets, should be classified in the 'market-based' profile, and it might well make sense for such borrowers to have a higher share of Libor mortgages.

Many customers are likely to find themselves somewhere between these two extremes. They could opt for the 'balanced' strategy, which consists of one-quarter Libor mortgages and three-quarters fixed-rate mortgages. The allocation to a mortgage profile should be discussed personally with your client advisor in every case.

No more than 50% Libor
Irrespective of the individual case, there are a number of principles that need to be observed. The interest markets have been dominated over the last few years by events that were hard to predict. Supplying the markets with plenty of cheap money led to very low Libor rates. But this could change in the future. "Even if they have a 'market-based' profile, customers should not have a portfolio with over 50 percent Libor mortgages," recommends Oliver Diener. Anyone who opts for Libor mortgages should also put aside the money they save when interest rates are low so that they can keep up higher interest payments later, if necessary. It is also important to keep a close eye on the development of longer-term interest rates and not just the Libor. Otherwise there is a risk that changing to a longer-term fixed-rate mortgage could cost a great deal more when interest rates are rising.

Simulating 2010 - 2020
A simulation of three different strategies and three different interest rate scenarios shows that the 'balanced' mortgage strategy fares extremely well from several different angles. If interest rate scenario 2 (a sharp rise followed by a gradual flattening-off) occurs during the next 10 years, the mortgage customer would do best with this strategy (see table). The total interest payments for this period are lower than with a simple Libor loan or a pair of two 5-year fixed-rate mortgages. Even if one of the other two scenarios took place, this balanced mix would yield a moderate average level of interest.

The maximum monthly payments are also important, reflecting the customer's financial capabilities. Viewed in this light, the 'balanced' version is constantly somewhere in the middle. This means that employing this strategy avoids having to make excessive monthly interest payments.

Balanced strategy counters fluctuating interest rates

The table shows how three different mortgage strategies (balanced, market-based, stable) impact on the financing of a 600,000 franc mortgage with three interest rate scenarios over the 10 years to 2020. A balanced strategy is the best way to smooth the highs and lows overall.

Interest rate scenario1: Constant moderate rises
Strategy Interest costs Av. interest rate Max. monthly payment
Balanced 184 803 3.08 2 252
Market-based 171 600 2.86 2 405
Stable 186 900 3.12 2 020
Interest rate scenario2: Sharp rise with gradual leveling-off
Strategy Interest costs Av. interest rate Max. monthly payment
Balanced 234 927 3.92 2 909
Market-based 249 300 4.16 2 530
Stable 245 400 4.09 2 998
Interest rate scenario3: Rise with subsequent leveling-off
Strategy Interest costs Av. interest rate Max. monthly payment
Balanced 217 025 3.62 2 583
Market-based 209 250 3.49 2 430
Stable 242 400 4.04 2 945

Balanced strategy
3-month Libor mortgage: 25%
5-year fixed-rate mortgage: 35%
7-year fixed-rate mortgage: 40%

Market-based strategy
100% in 3-month Libor mortgages

Stable strategy
100% in two 5-year fixed-rate mortgages

Real estate service

Single-family homes: Lake Geneva region leads the way

Single-family homes have been somewhat overshadowed by condominiums in terms of price rises over the last few years. The main reason is that high-earning migrants tend to prefer centrally located apartments. The prices of single-family homes increased by around 32% across the whole of Switzerland over the last decade, although there are very wide regional differences. Falling demand is likely to prevent prices rising much across Switzerland in the coming quarters.

Price increases for single-family homes, broken down by region Changes since the first half of 2000 in %

Index: first half of 2000 = 100

UBS "renovation" mortgage

Whether you want to modernize your home or boost its energy efficiency, UBS can help you renovate with an attractive special offer. You pay zero interest on your loan for the first six months. Your client advisor will be happy tell you all about it.

To find out more about UBS mortgages, visit