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LIBOR or fixed-rate mortgage? A comparison.

Fixed-rate or LIBOR mortgage? You can make things easier on your wallet and your nerves by choosing the right mortgage. You should take not only the mortgage interest but also your personal needs and preferences into account. This comparison will help you find out which type of mortgage is right for you. 

The right model mix saves money

Either when buying a home or refinancing an existing mortgage, homeowners can save a lot of money on financing by choosing the right mix of models. It is not only important for them to compare mortgage interest rates and keep an eye on how they develop. It is also just as important to understand the different mortgage models and combine them properly. The most common types in Switzerland are fixed-rate mortgages and LIBOR mortgages. Another version is the adjustable-rate mortgage

A short and simple guide to mortgage structuring

By finding the optimal structure for your mortgage – i.e., cleverly selecting the mortgage model and term – you can save money over the long term. Here is what you need to keep in mind and what influence your risk profile has on your selection.  

Fixed-rate mortgages: Secure planning

A fixed-rate mortgage, also known as a Fix mortgage, is concluded for a fixed term from between two and fifteen years. The client and bank agree a fixed mortgage interest rate that applies for the entire term. This mortgage model is popular among Swiss homeowners because it offers security. Borrowers know exactly how much money they will regularly owe the bank for the entire term of the mortgage. That way, they avoid any unpleasant surprises caused by rising interest rates over the long term.
Security comes at a price, however. With a fixed-rate mortgage, that generally means higher mortgage interest than what is charged for the market-oriented LIBOR mortgage. Homeowners also commit for the entire term when taking out a fixed-rate mortgage. If they want to pay off a mortgage early – because their house is being sold, for instance – any breakage costs still owed to the bank must be paid.

Go with the flow of market interest rates with a LIBOR mortgage

A LIBOR mortgage – also called a Flex rollover mortgage at Credit Suisse – is a market-oriented alternative to a fixed-rate mortgage. The interest rate on this type of mortgage at a particular moment is based on the London Interbank Offered Rate (LIBOR). That is the interest rate at which banks make short-term loans to one another. Much like a fixed-rate mortgage, a LIBOR mortgage involves agreeing on a term of one to two years. During that term, the mortgage interest rate is adjusted in line with the current LIBOR.
Clients themselves can choose how often the bank readjusts the interest rate: every three, six, or twelve months. In the past, LIBOR mortgages have been a reasonable alternative to fixed-rate mortgages when viewed over their entire terms. However, interest rates can fluctuate heavily.

Comparison of LIBOR, fixed-rate, and adjustable-rate mortgages

  Advantages Disadvantages

Fixed-rate mortgage

  • Fixed interest rate offers protection from rising rates
  • Allows borrowers to benefit from particularly low interest rates longer
  • Any drop in interest rates is not passed on
  • Fixed term makes them inflexible and expensive to pay off early

LIBOR mortgage

  • Borrowers can switch to a fixed-rate mortgage once each tranche expires
  • If the LIBOR drops, so does the mortgage interest
  • If interest rates rise, the mortgage quickly becomes more expensive
  • Interest rates can fluctuate greatly

Adjustable-rate mortgage

  • Any drop in interest rates is directly passed on
  • Flexibility: no fixed term, termination possible at any time
  • Rising interest rates have direct impact on budget
  • Higher interest rates are charged for flexibility

Mortgage interest and personal needs are the deciding factors

The choice of a mortgage depends on more than just financial aspects. Equally important are your personal needs and individual living situation. For example, a couple with dual incomes may prefer the more profitable but also riskier LIBOR mortgage. A family with less financial leeway, by contrast, would tend to go with a fixed-rate mortgage with the interest rate locked in. What is important is finding a balance among security, flexibility, and cost.

The same goes for choosing a term. Those who opt for a fixed-rate mortgage with a longer term will pay a higher interest rate to the bank, but that rate is guaranteed for the agreed term. Individual expectations for the development of interest rates are also key to personal strategy. It often makes sense to combine a LIBOR mortgage with a fixed-rate mortgage in order to obtain the optimal mix of flexibility and security. 

Do you have any questions about the different mortgage models?

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