Mortgage (Home Loan) Calculations in Switzerland

In Switzerland, mortgages are a common way to finance the purchase of real estate. The mortgage system is structured differently compared to some other countries, and it is important to understand the key components, including amortization, SARON-based mortgages, and fixed-rate mortgages. Below is a detailed explanation using a loan amount of CHF 1,000,000 as a reference.

1. Mortgage Overview in Switzerland

Swiss mortgages are typically divided into two parts:

• First Mortgage: Covers up to 65% of the property value. This portion is usually not amortized (i.e., you don't pay it down over time) and remains as long as you own the property.

• Second Mortgage: Covers the remaining amount (up to 80% of the property value). This portion must be amortized (paid down) within a specific time frame, typically 15 years or by retirement age.

For simplicity, we will assume the entire CHF 1,000,000 loan is subject to the same terms for this explanation.

2. Amortization

Amortization refers to the gradual repayment of the loan principal over time. In Switzerland, amortization is typically required for the second mortgage portion (or the amount exceeding 65% of the property value).

Example:

• Loan Amount: CHF 1,000,000

• Property Value: CHF 1,250,000 (assumed for this example)

• First Mortgage (65% of property value): CHF 812,500

• Second Mortgage (remaining amount): CHF 187,500

The second mortgage of CHF 187,500 must be amortized over 15 years. The annual amortization amount would be:

{Annual Amortization} ={t{Second Mortgage}} / {{Amortization Period}} ={187,500}/{15} = CHF 12,500

This means you would need to pay CHF 12,500 annually toward the principal of the second mortgage, in addition to the interest payments.

3. SARON-Based Mortgages

SARON (Swiss Average Rate Overnight) is a reference interest rate for the Swiss franc money market. It is a floating rate that changes daily based on market conditions. Banks typically add a fixed margin (commission) to the SARON rate to determine the total interest rate for a SARON-based mortgage.

Example:

• Loan Amount: CHF 1,000,000

• Current SARON Rate: 0.25%

• Bank Margin: 0.80%

• Total Interest Rate: SARON + Bank Margin = 0.25% + 0.80% = 1.05%

The annual interest payment would be:

[ \text{Annual Interest Payment} = \text{Loan Amount} \times \text{Total Interest Rate} ]

[ \text{Annual Interest Payment} = 1,000,000 \times 1.05% = CHF 10,500 ]

If the SARON rate changes, the total interest rate and the interest payment will also change accordingly. For example, if the SARON rate increases to 0.50%, the total interest rate would become 1.30% (0.50% + 0.80%), and the annual interest payment would increase to CHF 13,000.

4. Fixed-Rate Mortgages

A fixed-rate mortgage has a constant interest rate for a specified term, typically ranging from 2 to 10 years. This provides stability, as your interest payments remain the same regardless of market fluctuations.

Example:

• Loan Amount: CHF 1,000,000

• Fixed Interest Rate: 1.50% (assumed for a 5-year term)

The annual interest payment would be:

[ \text{Annual Interest Payment} = \text{Loan Amount} \times \text{Fixed Interest Rate} ]

[ \text{Annual Interest Payment} = 1,000,000 \times 1.50% = CHF 15,000 ]

Unlike SARON-based mortgages, the interest payment remains constant for the duration of the fixed-rate term, providing predictability.

5. Comparison of SARON vs. Fixed-Rate Mortgages

Aspect

SARON-Based Mortgage vs Fixed-Rate Mortgage

Interest Rate

Variable (SARON + Bank Margin) vs Fixed for the term

Risk

Higher (rate can increase or decrease) vs Lower (rate is locked in)

Flexibility

High (can adjust to market conditions)    vs Low (locked in for the term)

Predictability

Low (payments can vary)  vs High (payments are constant)

Example Annual Cost

CHF 10,500 (at 1.05% rate)   CHF 15,000 (at 1.50% rate)

6. Total Annual Costs (Including Amortization)

For a SARON-based mortgage:

• Annual Interest Payment: CHF 10,500

• Annual Amortization: CHF 12,500

• Total Annual Cost: CHF 23,000

For a Fixed-Rate Mortgage:

• Annual Interest Payment: CHF 15,000

• Annual Amortization: CHF 12,500

• Total Annual Cost: CHF 27,500

Key Considerations

• SARON Mortgages: Suitable for borrowers who are comfortable with fluctuating interest rates and want to benefit from potentially lower rates.

• Fixed-Rate Mortgages: Ideal for borrowers who prefer stability and predictability in their payments, even if it means paying a slightly higher rate.

It is important to consult with your bank or financial advisor to determine which mortgage type best suits your financial situation and risk tolerance.