In the second and third quarters of 2020, residential property prices in Switzerland were up just under 4 percent year-on-year – while rent fell by 2 percent. Analysts attribute much of this trend to COVID-19. And they assume that the real estate market will ease again with the economic recovery expected in 2021.
In terms of past market trends and forecasts, it’s worth taking a look at regional differences: according to the “Swiss Real Estate” report published by UBS at the beginning of December 2020, price increases were recorded in three quarters of all municipalities, and were particularly marked in and around the major centers. In some regions of Switzerland, prices per square meter have risen so sharply that there is a risk of sudden declines in value. This concerns the region around Lake Zurich, parts of central Switzerland with lake access, and the central regions of Basel and Lausanne.
However, it is also good to know that location-based costs of owner-occupied apartments fell by 1 percent in 2020 despite rising purchase prices on average across Switzerland. The most affordable place to live is in a property you own yourself in central Switzerland.
No interest rate changes in sight
No major changes are in sight in 2021 for long-term interest rates. The Swiss National Bank is likely to keep key interest rates stable. Interest rate intervention is only expected by the SNB in the event of interest rate cuts by the European Central Bank or a sluggish recovery of the economy. And in the case of short-term interest rates, analysts do not consider a convergence from below the zero mark likely for another ten years or so. For homeowners and those who want to acquire their own homes, these forecasts mean that variable money-market mortgages with short terms should remain less expensive than fixed-rate mortgages with long terms. Someone who took out a money-market mortgage ten years ago has had to pay 20 to 25 percent less for interest between then and now than someone with a ten-year fixed-rate mortgage.
3 questions for finding the right mortgage
Anyone wishing to take out a new mortgage or renew an expiring mortgage in 2021 has a choice between a fixed-rate mortgage, a money-market mortgage or a combination of the two. When making a decision, they should not only keep interest rate expectations in mind, but also ask themselves how they are positioned with regard to the following three risks:
- Interest rate risk
Security-oriented mortgage borrowers have had to bear higher costs over the past 20 years. Cost-oriented mortgage borrowers are likely to continue to fare better with money-market mortgages for the foreseeable future. However, they should be sure that they will be able to bear an increase in interest rates even if their income falls. In case of doubt, a fixed-rate mortgage makes perfect sense, and the additional costs are likely to remain low in 2021.
- Commitment risk
It can prove expensive to repay a mortgage early if the property has to be sold due to a change in living circumstances. In principle, the lower the interest rates on the date of contract termination, the higher the exit costs. And interest rates are currently low. When choosing the term of a fixed-rate mortgage, you should therefore consider how high you rate the probability of having to repay the mortgage early and how easy you will find it to bear the additional financial cost of doing so.
- Refinancing risk
Anyone who has to renew a relatively large fixed-rate mortgage at a certain point in time runs the risk of having to bear higher costs due to interest rate increases. The strategy to counter this consists of spreading long-term mortgages over time. At the moment, for example, a combination of a 7-year and a 10-year fixed-rate mortgage is close in price to a pure 10-year fixed-rate mortgage, but with a significantly lower refinancing risk. For homeowners who opt for short terms, the refinancing risk is not normally an issue.
UBS SARON Mortgages, the new variable solution since 2020
When it comes to money-market mortgages, the SARON (Swiss Average Rate Overnight) will no doubt definitively replace the Libor as the benchmark for interest rate calculation at the end of 2021. UBS therefore introduced two new variable products in 2020: the UBS SARON Mortgage and the UBS SARON Flex Mortgage.
Clients with a UBS Libor Mortgage have the option of switching to one of UBS’s two SARON mortgages or to a fixed-rate mortgage, free of charge and at their discretion. You will be personally informed by UBS in good time. Your advisor will of course be happy to answer any questions you may have.