Which mortgage is right for me?

Mortgage types in Switzerland

Apart from the numerous hybrid and special forms, there are essentially three main types of mortgages in Switzerland. They differ mainly in two aspects: the interest rate and the term. What they all have in common is that the interest rate depends on the mortgage amount, the term, market interest rates, and the creditworthiness of the borrower.

Fixed-rate mortgage

The fixed-rate mortgage remains the most popular choice when financing a property. It accounts for nearly 80% of the total mortgage volume in Switzerland. The key features of a fixed-rate mortgage are:

• Fixed interest rate
• Fixed term
• Predictable risk

At the start of the loan, you agree with your bank or insurer on both a fixed term and an interest rate, which will remain unchanged throughout the entire term. The rule is: the longer the term, the higher the interest rate.

Tip: If you are planning to take out a fixed-rate mortgage, be sure to compare offers. Even a small difference in the interest rate can have significant financial impacts over a long period.

Advantages of a fixed-rate mortgage

The biggest advantages of a fixed-rate mortgage are security, a fixed budget, and predictable risk. By locking in a fixed interest rate for a specific term, you can plan and budget for the long term.

Disadvantages of a fixed-rate mortgage

However, this security can also be a disadvantage: if interest rates fall significantly during the term of your mortgage, you cannot adjust your fixed-rate mortgage to benefit from the lower rates. Additionally, early termination of the mortgage contract may involve costs (here you can find more information on selling a property with a mortgage).

Who is the fixed-rate mortgage suitable for?

A fixed-rate mortgage is the right choice if you want a high level of security, fixed planning, and don’t want to actively deal with financial and capital markets. The market situation also plays a role: if you expect rising interest rates, a fixed-rate mortgage is a proven way to secure low rates for the long term.

Variable mortgage

In contrast to the fixed-rate mortgage, the variable mortgage has no fixed term and can usually be terminated within three to six months. The interest rate is not fixed and is based on the general interest rate level. However, it is not tied to a specific reference rate and is adjusted at the bank's discretion.

A variable mortgage can be attractive when interest rates are falling, as the borrower benefits from lower rates. However, in practice, the variable mortgage plays a relatively minor role for private individuals in Switzerland, as it is usually the most expensive option. The key features of a variable mortgage are:

• Variable interest rate
• No fixed term
• Can be terminated at any time
• Easy options for voluntary repayments

Advantages of a variable mortgage

In a high-interest environment, the variable mortgage has advantages compared to the fixed-rate mortgage, as it can be adjusted when interest rates fall. The freedom to terminate it at any time with three to six months' notice and switch to a more affordable provider is also a significant advantage, as is the option to make voluntary repayments.

Disadvantages of a variable mortgage

Typically (and especially in a low-interest environment), the variable mortgage is the most expensive option for private individuals when financing a property. You can only benefit if you carefully monitor developments in the money and capital markets and respond accordingly. Additionally, the somewhat arbitrary setting of interest rates by the bank presents a certain planning risk.

Who is the variable mortgage suitable for?

If you want to buy a property and plan to sell it shortly thereafter, the variable mortgage is an ideal transitional solution to finance the property in the short term and adjust it if necessary.

The money market or SARON mortgage

SARON stands for Swiss Average Rate Overnight and replaced the previously used money market interest rate LIBOR at the end of 2021. SARON is a reference interest rate based on actual transactions between banks.

Simply put, it represents the interest rate at which banks lend money to each other overnight. The final rate you, as a customer, receive is made up of the SARON rate plus a margin charged by the bank.

A SARON mortgage is typically set for a term of one to six years. During this period, the bank will adjust the interest rate at regular intervals. Usually, as a customer, you can choose whether these adjustments should occur every three, six, or twelve months.

Thus, the money market mortgage is essentially a type of fixed-rate mortgage with a short term, after which an interest rate adjustment takes place. The key features of SARON are:

• Term of 1 to 6 years
• Regular interest rate adjustments
• Limited planning security

Advantages of the money market or SARON mortgage

In general, the interest rate on a SARON mortgage is lower than that of a fixed-rate or variable mortgage. The rates are based on the current money market, which makes them transparent.

Disadvantages of the money market or SARON mortgage

Although the SARON mortgage can be the most affordable option, it offers limited planning security. The interest rates can fluctuate significantly—both upwards and downwards.

Tip: If you're considering a SARON mortgage, you can protect yourself from excessive rate increases by using a "cap" (i.e., a rate ceiling). However, the bank will charge an extra fee for this security.

Who is the money market or SARON mortgage suitable for?

If you expect low interest rates and can easily absorb short-term interest rate increases, the SARON mortgage can be an attractive option. However, in the case of rapidly rising rates, the fixed-rate mortgage is a better alternative. Since the 1990s, money market mortgages have generally been the most affordable mortgage model.

Mortgage comparison: which strategy fits me best?

Which mortgage model is best for you depends heavily on your personal situation, interest rate forecasts, and market conditions. Often, a mix of different mortgage types is the best way to tailor the financing of your property to your specific needs.

Cleverly combining mortgages

When financing a property, you don’t necessarily have to choose just one mortgage model. You also have the option to combine different terms, amounts, and mortgage types that best suit your needs.

One option is to combine a SARON mortgage with a fixed-rate mortgage. The fixed-rate mortgage increases your planning security, while you can also benefit from the lower interest rates of the SARON mortgage.

With so-called mortgage splitting, you can divide a fixed-rate mortgage into several tranches with different terms. This way, not the entire mortgage is renewed at once, but only the respective tranche. The interest rate change upon contract renewal affects only the specific part.

However, you should keep in mind that switching the mortgage to another provider is either difficult or not possible: partial mortgages are rarely paid off early.

Our tips for taking out a mortgage

Before choosing a mortgage model, we recommend keeping the following tips in mind.

• Tip 1: Take enough time for research and inform yourself thoroughly. Familiarize yourself with the different options and compare offers. The more you know about the topic, the better you can choose the best option.

• Tip 2: Get advice from professionals and visit various providers. Insurances often offer better terms for fixed-rate mortgages with long terms, while banks can typically offer better rates for shorter terms and SARON mortgages.

• Tip 3: Compare at least three offers in detail.

• Tip 4: Calculate generously to be on the safe side. Estimate the affordability of your property by assuming 5% of the mortgage amount for interest. Add 1% of the purchase price for maintenance and incidental costs of the property, as well as 1% for amortization.

• Tip 5: Stay informed even after signing a mortgage. Particularly when a fixed-rate mortgage is about to expire, make sure to shop around and compare the best offers from other mortgage providers. This way, you can save a lot of money.