Saron mortgage: What do you need to know about this type of mortgage?

To finance the purchase of a property, you can take out a fixed-rate or variable-rate mortgage, or a mortgage indexed to the money market (or “Saron”). Although only about one in five loans in Switzerland is a Saron mortgage, it is one of the most advantageous ways of financing a property. What is a Saron mortgage and why is it interesting?

What is a Saron mortgage?

A Saron mortgage is a type of short-term mortgage whose rate varies according to a benchmark index, the Saron. Saron is the acronym for Swiss Average Rate Overnight: the average interest rate at which the Swiss National Bank and commercial banks lend money to each other over the course of a day. It is revised daily on the basis of transactions actually carried out by financial institutions. However, variations remain moderate: the Swiss National Bank tries to keep it close to its official key rate.

In the case of a mortgage indexed to the money market, the interest rate is therefore fixed on the basis of changes in this monetary reference index, denominated in Swiss francs. To this base rate, the banks add their own margin, which varies between 0.8% and 1.3% depending on the creditworthiness of the applicant.

How does the mortgage interest rate change?

If the margin set by the bank does not change, the variable interest rate is adjusted in line with changes in the Saron, depending on the frequency chosen: monthly, quarterly or half-yearly. The financial institution calculates an average interest rate over this period, called “compound Saron”, which corresponds to a capitalised Saron. The borrower’s rate therefore varies at the end of the settlement period, which means that the amount of interest paid is different each time. When the reference index is negative, a base rate of 0% is used for the calculation, but the bank still receives the margin agreed in the contract.

In this way, the Saron mortgage contrasts sharply with the fixed-rate mortgage: the latter, which is more common, is characterised by a single rate that remains the same throughout the term of the loan. In addition, a mortgage indexed to the money market is taken out for a short term, from 3 to 5 years, depending on the canton and the bank.

What are the advantages of a Saron mortgage?

Compared with other financing models (fixed and variable rate), the Saron mortgage offers many advantages for the borrower.

– The benchmark rate is generally stable, and more representative of real market trends than other monetary indices such as Libor(London Interbank Offered Rate). This stability means less volatility in interest rates and favourable market conditions for borrowers.

– As a result, the mortgage interest rate calculated on the basis of the Saron is often lower than the rate for a long-term loan, which is set by default by the banks at 5%. This leads to significant savings on the interest paid, even when the bank’s margin is taken into account.

– The Saron mortgage stands out for its flexibility. The financial institution can offer you the choice of how often the rate is adjusted (monthly, quarterly, half-yearly), and can even convert the loan into a fixed-rate mortgage at the next repayment date if the index rises too much.

– Money-market index-linked mortgages often offer advantageous terms for early repayment or termination of the contract, whereas long-term loans sometimes come with very high charges. However, if there is a change in your personal or professional life, you may have to sell the property and terminate the mortgage.

What are the disadvantages of the Saron mortgage?

All the advantages of a Saron mortgage should not obscure the fact that there are a few disadvantages specific to this type of loan, and that it is essential to include them in your financial planning.

On the one hand, changes in the interest rate throughout the term of the loan are a source of uncertainty. While indexing the mortgage rate to the Saron index is generally attractive for borrowers, you need to bear in mind that the index is likely to rise, and therefore increase the amount of your interest in a fairly short space of time. However, you can get round this obstacle by observing two simple rules:

– For each settlement period, set aside the amount that corresponds to the difference between your current rate and the average mortgage rate of 5% set under a conventional mortgage. In the event of a sharp rise, you can draw on this reserve to compensate.

– If the index rises above a certain threshold agreed in advance with the bank, you will always have the option of converting the Saron mortgage into a fixed-rate mortgage at the end of the current interest period.

On the other hand, these interest rate fluctuations mean that you need to be flexible because of variable payments. This is all the more true because the bank will only inform you of the revised rate after the fact, once the settlement period is over. As a result, you won’t know the amount of your interest until very late… Unless you keep yourself informed of changes in the Saron, for example by using the online calculator provided by the Swiss Stock Exchange.

In conclusion, the Saron mortgage is an attractive financing model for anyone considering investing in property. However, its specific mechanism means that you need to be both flexible and cautious. Don’t hesitate to discuss it with your real estate broker.