Inflation remains How the key interest rate cut affects your mortgage

The Swiss National Bank has cut the key interest rate surprisingly sharply, making fixed-rate mortgages significantly cheaper. Consumers benefit, but experts warn of long-term risks.

As expected, the Swiss National Bank (SNB) lowered the key interest rate in December. However, the size of the adjustment was unexpected: with an interest rate cut of 0.5 percentage points, it halved the key interest rate from 1 percent to 0.5 percent. This was the fourth key interest rate cut in a row. At the beginning of the year, the key interest rate was still 1.75 percent, according to the comparison portal Comparis.

In its cycle of interest rate cuts, the SNB is well ahead of the European Central Bank (ECB) and the US Federal Reserve (Fed), which both reduced their key interest rates by 0.25 percentage points to 3 percent and 4.25 to 4.50 percent respectively. While the eurozone is suffering from the economic weakness of large member states such as Germany, the US economy is proving to be very robust.

Interest rate policy depends to a large extent on the development of inflation. While inflation in Switzerland has been well below 1 percent for months, it has recently risen slightly again in the eurozone and the US and is above the target of 2 percent. "In its interest rate decision, the Fed signaled that inflation is proving more persistent than originally expected. It is also not clear how the new government's announced tariff policy will affect prices. It therefore announced a more cautious approach to interest rate cuts next year. The US dollar has therefore appreciated again somewhat against the franc," comments Comparis financial expert Dirk Renkert.

SNB interest rate move weakens franc

"With its decision to lower the key interest rate by 0.5 percentage points to 0.5 percent, the SNB sent a clear signal," Renkert continues. The SNB sees the greater threat to economic development in prices that are too low. Consumers could hold back on their purchasing decisions in anticipation of prices falling further, which would lead to a drop in sales for the companies affected.

"The main reasons for the low inflation were a strong franc and falling energy prices," says the Comparis financial expert. It is also expected that previously announced electricity price cuts averaging 10 percent and falling mortgage interest rates will lead to an easing of existing rents and thus lower inflation.

"A strong franc is both a blessing and a curse for the SNB - while a strong franc was useful in combating high inflation, as it made imported goods cheaper, it is seen as a shortcoming in times of low inflation. It almost seems as if the SNB wants to break the strength of the franc at all costs with its interest rate move," says Renkert.

Fixed-rate mortgages continue to fall in price

In anticipation of further falling interest rates, fixed-rate mortgages also became cheaper in the 4th quarter. The reference interest rates (so-called benchmark interest rates) for 10-year fixed-rate mortgages published by over 30 credit institutions were 1.63% (as at December 31), which is 0.18 percentage points lower than the 1.81% recorded at the end of September. The benchmark rate for 5-year fixed-rate mortgages was 1.44% (as at December 31), 0.24 percentage points lower than the end of September at 1.68%.

At the beginning of 2024, the benchmark rates for 10-year and 5-year fixed-rate mortgages were 2.26% and 2.12% respectively, 0.63 percentage points and 0.68 percentage points higher than at the end of December. The yield on 10-year federal bonds was also 0.32 percent at the end of December and 0.34 percentage points lower compared to 0.66 percent at the beginning of the year.

Medium-term fixed-rate mortgages still cheaper than Saron mortgages

Saron mortgages have become around 1.25 percentage points cheaper following the 4 key interest rate cuts this year. This means that they are still more expensive than fixed-rate mortgages with a medium term, but slightly cheaper than fixed-rate mortgages with a 10-year term. The spreads traded in December are as follows: First-rate Saron mortgages cost on average around 1.1 to 1.6 percent, 5-year fixed-rate mortgages around 1.0 to 1.5 percent and 10-year fixed-rate mortgages traded around 1.1 to 1.7 percent.

"With the 0.5 percentage point interest rate hike, Saron mortgages have become significantly cheaper. The benchmark interest rates for fixed-rate mortgages had already fallen before, but not quite as much. Nevertheless, fixed-rate mortgages are still at a very attractive level. Anyone looking for planning security at attractive conditions is well served with fixed-rate mortgages. For those who can bear the risk of interest rate changes and believe that interest rates will continue to fall, Saron mortgages are probably more suitable," says Renkert.

Share of long-term fixed-rate mortgages at almost 80 percent

Comparis' mortgage partner HypoPlus shows an unbroken preference for fixed-rate mortgages with long terms. In the 4th quarter, around 77 percent of all mortgage borrowers opted for a fixed-rate mortgage with a term of 10 years or longer. In the previous quarter, the proportion was already around 70 percent, whereas in the first two quarters of the year it was only 40 to 50 percent.

At around 11%, the proportion of medium-term mortgages (4 to 6 years) was only slightly lower than in the previous quarter (around 14%). In comparison: in the 2nd quarter, the share was still around 30 percent. The proportion of mortgages with a term of up to three years (including Saron mortgages) remained almost unchanged compared to the 3rd quarter at 7%. Saron mortgages accounted for around 4 percent of this figure.

"4 out of 5 mortgage borrowers opted for long-term fixed-rate mortgages. In addition to high planning security, attractive conditions are likely to have contributed to this decision," says Renkert.

High savings potential when negotiating

Comparis compared the average differences between the benchmark rate and the top interest rate of HypoPlus for 3-, 5-, 10- and 15-year mortgages as of December 31 and calculated a considerable savings potential over the term of the mortgage.

The target rates calculated by Comparis are published but still negotiable average interest rates from over 30 mortgage institutions. The deals actually negotiated by HypoPlus are significantly lower: the best interest rate negotiated for a ten-year fixed-rate mortgage is 1.15 percent (as of December 31, 2024). In contrast, the benchmark rate is 1.63 percent.