Mortgages SARON: what the changeover means for mortgages

Here you will find answers to the most important questions about the new SARON mortgages.

byUBS Insights 27 Nov 2020

The LIBOR benchmark interest rate, which for years has been the most important interest rate worldwide and the basis for many contracts for loans and mortgages concluded on the financial markets, will be a thing of the past by the end of 2021. In Switzerland, the SARON (Swiss Average Rate Overnight), a proven benchmark interest rate that has existed since 2009, is now the reference for variable-rate mortgages.

Why is the LIBOR being replaced?

In mid-2017, the British Financial Conduct Authority announced that it would only support the determination of the LIBOR (London Interbank Offered Rate) until the end of 2021. The main reason for this decision was the financial market crisis in 2008/2009, after which fewer and fewer commercial banks were prepared to grant each other unsecured loans. As a result, LIBOR was less and less supported by transactions that were actually carried out. Instead, it was based more and more on estimates, which caused it to lose in significance and credibility.

Why is Switzerland opting for the SARON?

The establishment of the SARON as the new benchmark interest rate in Switzerland is based on a recommendation made in 2017 by the National Working Group on Swiss Franc Reference Rates (NWA). The SARON, which was introduced in 2009, is determined on the basis of completed transactions and binding price requests in the Swiss money market – the calculation method was developed by the Swiss National Bank (SNB) and SIX Group Ltd (SIX). The benchmark interest rate is publicly visible and is calculated and published by SIX daily after the close of trading. Alfred Ledermann, Head Lending & Deposit Products at UBS Switzerland and member of the NWG, explains the strengths of the SARON: “There is a liquid and transparent market with large numbers of transactions behind the SARON. The interest rate is robust, representative and administered in Switzerland.”

What is the Compounded SARON?

The SARON is a daily rate that is valid for the overnight interest-rate period. However, money-market mortgages require longer interest periods and a longer-term interest rate. This is known as the Compounded SARON. The Compounded SARON is also calculated by SIX, based on the daily compounded rates. The calculation is carried out retrospectively, which from the client’s point of view is the main difference in relation to the LIBOR mortgage. In other words, the interest rate applicable to the borrower is set at the end of the three-month interest period – in a similar way to electricity, where users are billed afterwards for their actual consumption. Good to know for mortgage clients: in the past, the Compounded SARON ran almost parallel to the 3-month LIBOR, and has even proved lower and more stable in turbulent market phases.

How is the interest calculated?

The NWG has developed seven different variants for the precise calculation of the Compounded SARON, three of which are currently used on the Swiss market:

Plain – the basic variant (used for UBS products)

The observation period and the interest period are identical. The interest rate is applied at the end of the period, usually at the end of the quarter.

Lookback – reset days prior

The observation period and interest rate period are of equal length, but the observation period is brought forward by, for example, one month. If interest rates change during this one-month lookback period, only one third of the total interest rate is affected. In return, the bank and the mortgage holder have sufficient time to settle and pay the interest.

Last reset – period shift

The observation period is brought forward by a whole interest rate period. The interest rate – as was previously the case with the LIBOR – is known on the first day of each interest period. The disadvantage is that an outdated interest rate is always applied, so that banks lose money when mortgage interest rates rise, while borrowers pay too much interest when rates fall.

How high are the interest rates?

Both the SARON and the LIBOR are short-term money-market interest rates and have long been negative. Given the low interest rates in the eurozone and the ongoing overvaluation of the Swiss franc, this is likely to continue until the end of 2021.

SARON mortgages are particularly suitable for clients who actively follow market developments and expect interest rates to fall or move sideways.

What SARON products does UBS offer?

UBS offers two unlimited, variable-rate mortgage products: the UBS SARON Mortgage and the UBS SARON Flex Mortgage. Both offer borrowers the opportunity to protect themselves against rising interest rates by switching to a multi-year UBS Fixed-Rate Mortgage, in whole or in part, within a few working days. With the Flex version, the borrower has the option to pay off the loan amount flexibly four times a year.

Learn more about UBS SARON Mortgages

Are you looking for unlimited, flexible financing for your property in line with market conditions? If so, you can benefit from particularly attractive interest rates with the UBS SARON Mortgage and the UBS SARON Flex Mortgage.

How do you switch from a LIBOR mortgage to a SARON mortgage?

If you have a UBS LIBOR Mortgage, you can switch to a UBS SARON Mortgage, UBS SARON Flex Mortgage or UBS Fixed-Rate Mortgage free of charge. All existing LIBOR mortgages must be converted by the end of 2021. Clients with a LIBOR mortgage will be informed by UBS in good time.