Rising mortgage rates in Switzerland, what's going on?

Article written by Badr Berbar, Head of Business Development at E-potek, our financial partner.

Mortgage rates saw a sudden raise last week; some lenders announcing an increase of more than 0.50% in less than five days. A potential change which has worried many borrowers who have not yet fixed their rates.

As a reminder, the downward trend that we have known for the past ten years is the result of a coordinated policy of monetary easing carried out by the largest central banks in the world. Introduced since the financial crisis of 2008, this gradual drop in rates was intended to encourage people to invest their capital in the real economy instead of keeping it in their bank accounts or in cash with no possibility of return. Indeed, faced with the choice of making its capital grow through an investment or keeping it in a bank account with no return, the theory is that a rational investor chooses to invest.

Used by central banks as an instrument for economic recovery, interest rates also represent a barometer to gauge the abundance of liquidity on the market. In other words, the more money there is on the market, the cheaper it becomes to borrow and, respectively, the less money there is in the markets and the more expensive it becomes to borrow, becoming rare. It is the famous concept of supply and demand.

The abundance of liquidity that we have known in recent years (resulting amongst other things from the policy of monetary easing which was mentioned above) led us to the unusual situation where certain financial establishments paid money in order to lend it .

In fact, by analyzing the recent evolution of the 10-year IRS rate (interbank reference rate which reflects the availability of liquidity in circulation as well as the confidence of financial institutions to lend money to each other, at 10 years), we note that the latter reached a historically low record at -0.70%, to suddenly return to positive.

But then, what was the origin of this sudden increase, causing the increase in mortgage rates observed last week?

The spread of Covid-19 and the large-scale containment measures are the main causes behind the sudden rebound in interest rates that we have observed.

Although essential and necessary in order to stem the spread of the virus, these measures will not be without effect for the world economy which should register a severe slowdown.

On the strength of this observation, the market (or all of the economic players) automatically anticipated a lack of future liquidity, thus causing a temporary increase in interest rates.

In response to this and to de-escalate this hike, major central banks and countries around the world have announced unprecedented series of measures to support companies facing liquidity problems.

These include among others:

1. Easier access to credit, guaranteed by the state.

2. The massive takeover of assets by central banks to provide liquidity to governments and financial institutions.

3. The drop in key interest rates

4. Support for companies in the form of allowances (e.g. partial unemployment, reduction of social charges and taxes, etc.)

If we take a closer look, we observe that these unprecedented measures are even more generous than those deployed in response to the 2008 financial crisis.

The Federal Reserve of the United States announced, for the moment, the repurchase of more than 700 billion of assets and lowered its key interest rate to 0% until further notice. The senate is also discussing an additional grant intended for businesses that will be impacted.

The Swiss National Bank maintains its key rate but increases the deductible on which financial institutions do not pay negative interest.

The European Central Bank has announced a massive asset repurchase amounting to 750 billion euros in order to ease the liquidity of financial institutions.

The latter reserves, in particular the right to repurchase bonds of Greece, subject which was the center of many disagreements between the member states of Europe at the time of the last crisis.

Projections

Today, it is difficult to say with certainty about the economic repercussions linked to Covid-19, which is dependent on controlling the epidemic.

However, the magnitude of the aid announced as well as the numerous support measures applied at the local level, show a firm will to put in place the necessary measures in order to support the global economy.

Updating these measures in response to the latest macroeconomic developments suggests that the nature of this rebound is only spontaneous and will certainly fade quickly. The risk of an increase in mortgage rates over the long term therefore remains very low in our opinion.

In the light of the elements mentioned above and the rates being always close to the historic lows, we invite any borrower to fix their rates over long periods, as far as the nature of the project allows.

Our advisers are at your disposal to assist you and advise you in your strategic decisions.

The possibility of fixing your rates free of charge up to 24 months in advance or of obtaining very attractive fixed rates over 25 years, without penalty in the event of early repayment are in particular solutions that we offer to our customers.

Contact their advisers , they will be happy to answer your questions.