Greater security thanks to a forward mortgage.
Mortgage interest rates are currently at record lows and many homeowners want to take advantage of this. With a forward mortgage, you can fix the interest rate of a future fixed-rate mortgage right now, even if your current mortgage has not yet reached the end of its term.
Fixing mortgage interest in advance
The happy news of low interest is currently a common topic in newspapers and online media. This is great for people who are currently renewing their mortgages. But even homeowners with some time left on their current mortgage term can benefit. With a forward mortgage, the interest rate can be fixed in advance, even if the current term is not yet ending. This lead time from when the interest rate is fixed until the start of the mortgage can be several months. With Credit Suisse, or other institutions, it is even possible to fix the interest rate up to three years in advance.
With a forward mortgage you gain security and time with the decision. It protects against rising interest rates. Such a solution can also be useful when planning a longer stay abroad. It means that financial matters can be settled with the bank before you depart.
Forward mortgage when mortgage interest rates are rising
Many experts expect interest rates to rise in the coming years. A forward mortgage allows you to secure a more favorable interest rate for the next term of the fixed-rate mortgage in advance. This provides financial security, since the homeowner knows how high the interest rates for their mortgage will effectively be for the coming years.
Without a forward mortgage, the homeowner remains dependent on mortgage interest rate developments. For example, they could increase exactly when the mortgage is due to be renewed, as a result of turbulence in the global economy. The forward mortgage protects against this scenario.
Forward mortgage remains fixed despite fluctuating interest rate
Source: Credit Suisse
Protect against rising interest with a forward mortgage
With overall financing of CHF 973,000, the full amount or only one or two financing tranches can be protected against rising interest with a forward mortgage. The interest-free waiting period must not exceed three years.
|
Amount (CHF) |
Taking out the mortgage |
Term |
Interest rate % |
Tranche 1 |
200,000 |
Nov 5, 2018 |
Nov 13, 2018 – Nov 13, 2022 |
1.00 |
Tranche 2 |
273,000 |
Nov 5, 2018 |
Nov 13, 2018 – Nov 13, 2028 |
1.50 |
Tranche 3 |
500,000 |
Nov 5, 2018 |
Nov 5, 2019 – Nov 5, 2024 |
1.30 |
Source: Credit Suisse
Surcharge for forward mortgage
However, the early guaranteed interest rate of a forward mortgage is not available free of charge. The mortgage interest will be slightly higher than if the fixed-rate mortgage was taken out with immediate effect. This is because with the forward mortgage, a security premium in the form of a surcharge has to be paid. The amount of this forward surcharge will vary according to the bank and mortgage. The main determining factors are the term of the mortgage and the length of the waiting period. The interest-rate development expected by the bank will also have an influence.
Whether a forward mortgage will in fact work out to be worthwhile ultimately depends on the effective development of mortgage interest rates. Generally speaking, it is worth fixing the interest rate in advance if a significant rise in interest rates is expected. If the interest rate falls or stays the same, the surcharge of a forward mortgage does not pay off in the end, purely as a calculation.
The interest rate of the forward mortgage depends on the waiting period and term
The interest rate of the forward mortgage is higher the longer the waiting period and term. In the example, a mortgage of CHF 500,000 is taken out, with the waiting period beginning on March 11, 2019.
| Term | Start of term |
Interest rate in percent |
3 years |
April 1, 2019 |
1.13 |
3 years |
July 1, 2019 |
1.18 |
3 years |
April 1, 2020 |
1.32 |
5 years |
April 1, 2019 |
1.13 |
5 years |
July 1, 2019 |
1.18 |
5 years |
April 1, 2020 |
1.33 |
10 years |
April 1, 2019 |
1.41 |
10 years |
July 1, 2019 |
1.45 |
10 years |
April 1, 2020 |
1.59 |
Source: Credit Suisse
The development of mortgage interest rates cannot be predicted
The key factors for determining whether to consider a forward mortgage are personal interest-rate expectations and individual life circumstances. People who expect significantly higher interest rates can protect themselves against a price rise early on with this mortgage product. Maybe the forward surcharge will pay off later, and lots of money will be saved.
But even if interest rates are generally assumed to remain the same, or they fall in relation to expectations, a forward mortgage could be worthwhile. This is because homeowners who seek security may be glad to know the interest rate in advance. That way the mortgage interest costs can be calculated for the entire term of the new mortgage, and the homeowner is immune to nasty surprises.
