What does the recent rise in interest rates mean for fixed rate mortgages?

Inflation forecasts also up for 2022

In Switzerland too, prices have recently increased, although to a much lesser extent than abroad. In 2021, the purchasing power of the franc (as measured in consumer goods) fell by 0.6%; for 2022, we even expect inflation of 1.5%. This rate is certainly significantly higher than in recent years, but it is still comfortably within the range targeted by the Swiss National Bank (SNB), i.e. 0 ‒ 2%. So, despite rising inflation, we don’t believe the SNB will abandon its negative rate policy until 2023. Therefore, short-term SARON interest rate-linked mortgages should remain as cheap as they are today. today for a long time.

The effects on the real estate market are limited

With rising inflation expectations worldwide, long-term capital market interest rates rose in Switzerland as well. For the first time since the end of 2018, the yield on 10-year Confederation bonds returned to positive territory. The rise in long-term interest rates is already reflected in the terms of fixed-rate mortgages: in January, 10-year fixed-rate mortgages were around 0.25% more expensive than in December 2021. Over the year as a whole, long-term rates should continue to rise slightly. According to our forecast, the cost of fixed-rate mortgages is expected to increase further by 0.2–0.3%.

What this “turnaround” in interest rates means for the real estate market – and in particular for own-use housing – can be asked at the present time. First of all, it should be pointed out that this change is less pronounced than it seems. Historically, mortgage rates remain extremely low, and the recent rise in interest rates will have only a negligible effect. It is only talked about so much because interest rates have almost stagnated in recent years, and we have become accustomed to this stability.

Little impact on demand for real estate

The recent rise in interest rates will therefore have very little effect on demand for real estate in general, and demand for housing in particular. Because even with slightly higher rates, owning your home will still be financially more advantageous for a long time to come than renting. Demand that is still sustained will therefore continue to face an insufficient supply. Also, the purchase price of housing should continue to rise. That said, record price growth for single-family homes and apartments in 2021 is likely to falter, not because of rising interest rates, but rather because, as property prices rise, capital requirements and of financial capacity for mortgage loans increasingly restrict the potential clientele. The current trend in interest rates will not change the overall situation on the residential property market.

In fact, recent headlines about mortgage rates should remind homeowners – current and future – that interest rates are a volatile variable, very difficult to predict. Before extending a maturing mortgage or buying a home, you should think carefully about which financing model is best suited to your situation. In general, short-term SARON mortgages are often cheaper over time, and save a few hundred francs each year. But if, contrary to expectations, interest rates rise, the rise will be felt immediately.

With fixed rate mortgages, on the other hand, the interest charges are usually a little heavier in the long term, but the evolution of the capital markets will not disturb your sleep. The price of security and serenity offered by fixed rate mortgages has certainly increased with interest rates, but in historical perspective, this cover remains very cheap. So if, given the recent evolution of inflation, we fear a rise in interest rates and we do not trust the forecasts, there is still time to choose a long-term fixed remuneration, to an affordable price.