LIBOR or fixed-rate mortgage? – spoilt for choice
Mortgage interest rates are rising again slowly but surely. Now is the time for home owners to start thinking about their future mortgage options: LIBOR or fixed-rate? As well as considering the financial aspects, your personal requirements and preferences also need to be taken into account.
Interest rates for fixed mortgages are rising
The Swiss economy is running smoothly again, with Credit Suisse economists expecting it to grow by 2.2% in 2018. Inflation likewise remains benign so far, although the Swiss National Bank expects inflation to rise above its target in the long term. A tightening of monetary policy is therefore just around the corner.
In March 2019, we are likely to see the Swiss National Bank raise key interest rates for the first time – from –0.75% to –0.5%. The effect on mortgage interest rates will differ: While LIBOR mortgage interest rates are likely to remain stable for the time being, interest rates on fixed-rate mortgages will continue to increase. We anticipate a further rise of 30 to 50 basis points.
LIBOR mortgages usually more affordable than fixed-rate mortgages
Although interest rates for fixed-rate mortgages have started to rise, they remain low by historical standards. Now is therefore the time for home owners to start thinking about what type of mortgage to choose for the future: LIBOR or fixed-rate.
Financially, the figures show that with a few exceptions fixed-rate mortgages are more expensive than a LIBOR mortgage over the term as a whole. Only between 1986 and the end of 1989, as well as for a brief period in 2004 and 2005, would a five-year fixed-rate mortgage, for example, have been cheaper than a LIBOR mortgage. In fact, the only time a ten-year fixed-rate mortgage would have been a better option was at the end of the 1980s.
Switching from a LIBOR to a fixed-rate mortgage
In purely financial terms, therefore, a fixed-rate mortgage is very rarely worthwhile. Even so, fixed-rate mortgages can be justified – particularly in situations in which interest rates rise abruptly, as happened at the end of the 1980s. Home owners with an adjustable-rate mortgage – the most frequently chosen product at the time – had to pay massively higher interest rates of almost 8 percent within a very short space of time. Not all property owners are willing to accept such a rapid, sharp rise in interest rates.
From that point of view, fixed-rate mortgages can be regarded as an insurance product. They offer protection, but at a premium. Replacing a LIBOR mortgage with a fixed-rate mortgage can make sense, particularly in the current situation with its historically low premium for a ten-year fixed-rate mortgage. But home owners should not delay switching, because interest rates on fixed-rate mortgages are likely to rise further. The difference between LIBOR and fixed-rate mortgages is therefore constantly widening.
Personal requirements are crucial in the choice of product
The choice of mortgage is not just down to financial aspects – personal requirements and preferences are equally important. A rapid rise in adjustable mortgage interest rates can prove stressful. Individual expectations for the development of interest rates are also key to personal strategy.
It often makes sense to combine different mortgages and terms to achieve an optimum mix between flexibility and security. A consultation with a Financing Expert can help clarify your personal needs and mortgage requirements.