SARON mortgage — probably the cheapest form of financing in the long term
What is SARON? - The definition
The SARON (Swiss Average Rate Overnight) is the reference interest rate for the Swiss money market. It shows the conditions under which banks in Switzerland borrow money overnight and is based exclusively on actual transactions on the market, which makes it stable and resistant to manipulation. The SARON is produced by SIX Swiss Exchange regulates and forms the basis of many money market products, including the SARON mortgage.
Since 2009, it has been a central interest rate in Switzerland and has replaced the LIBOR used so far, as SARON is more precise and transparent. It is closely based on the key interest rate of Swiss National Bank (SNB) and is known for adapting to current market conditions.
What is a SARON mortgage?
One SARON mortgage is a form of adjustable-rate mortgage whose interest rate is based on daily SARON values. Banks often offer SARON mortgages with a Framework period of 1 to 5 years on. Within this term, the mortgage interest rate is adjusted regularly, usually at the beginning of each quarter.
The interest rate on a SARON mortgage consists of SARON Compound, an average calculation of SARON over a specific period, and a contractually defined margin, which depends on the borrower's credit rating. The final interest rate, which is calculated retroactively, therefore reflects a value close to the market.
Advantages and disadvantages of a SARON mortgage
- Affordable: Since the interest rate on a SARON mortgage is flexible and is constantly based on the current market, borrowers benefit from lower interest rates during periods of low interest rates and thus save on financing costs.
- Flexible: In phases of rising interest rates, a SARON mortgage can be converted into a fixed-rate mortgage. However, in times when interest rates are rising, long-term fixed-rate mortgages are of course also more expensive.
- Restless: Since the interest rate is adjusted to SARON on a quarterly basis, it is inherently fluctuating. This means a certain amount of volatility for the borrower; the quarterly payments are not the same. If you want to track the SARON values during running time, you can download the data on the SIX Swiss Exchange-Get the website.
SARON vs. LIBOR: What's changed?
The SARON and the LIBOR These are both reference interest rates, but they differ in their basis of calculation. During SARON on real transactions based, LIBOR was determined on the basis of bank statements and assessments, which were also susceptible to manipulation. LIBOR, which was officially discontinued in 2022, has given way to SARON as it is considered more transparent and secure.
Which is cheaper: SARON or fixed-rate mortgage?
According to UBS, a SARON mortgage is usually cheaper than a fixed-rate mortgage in the long term: https://www.ubs.com/ch/de/private/mortgages/information/magazine/articles/saron-or-fixed-rate-mortgage.html#:~:text=Langfristig shows that %2C is cheaper than a fixed-rate mortgage. &text=The mortgage borrower benefits from the fixed-rate mortgage being immutable. &text=Mortgage borrowers benefit from the flexible interest rate%2C when interest rates fall. , -On the other hand, do they go up
Historically speaking, this statement is true: Anyone who chose a ten-year fixed-rate mortgage of 500,000 francs between 2012 and 2022 paid a total of CHF 94,000 in interest over this period. A money market mortgage, on the other hand, cost just CHF 40,000 in the same period, and two consecutive five-year fixed-rate mortgages totaled CHF 60,000. In these ten years, the money market mortgage was therefore CHF 54,000 cheaper than the ten-year fixed-rate mortgage and CHF 20,000 cheaper than the variant with two five-year fixed-rate mortgages.
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