Fixed-rate mortgage: everything you need to know to finance a property purchase

Are you looking for a financing solution for your property purchase in Switzerland? A fixed-rate mortgage is the model most commonly chosen by borrowers: by virtue ofan interest rate agreed in advance and stable throughout the term of the loan, you are protected against any upward movement. Conversely, you won’t benefit from any falls on the markets, unless you take out several mortgages with successive maturities. Find out how a fixed-rate mortgage works and what its advantages are.

How does a fixed-rate mortgage work?

As the name suggests, this type of mortgage guarantees a fixed interest rate for the entire term of the loan. The interest is agreed with the bank when the mortgage is taken out, for a term of between 1 and 15 years. You can also opt for shorter terms, to take advantage of the renewal of the mortgage to obtain a lower rate.

With a fixed-rate mortgage, there is no maximum amount: the sum you can borrow is determined according to your financial capacity, i.e. the proportion of charges in your income. This must not exceed one third of your gross annual income. You should also be aware that the bank will lend up to 80% of the value of the property you own, based on a valuation carried out by the bank. The remaining 20% is made up of your own funds, at least half of which must not come from occupational pension provision (second pillar).

You can choose between direct and indirect repayment of your mortgage. In the first case, you reduce your debt with each repayment, and your interest gradually falls. In the second case, you invest the monthly instalments in pension savings (third pillar) and repay the same interest throughout the term of the loan, before paying off the loan at maturity.

How is the interest rate set for a fixed mortgage?

By taking out a fixed-rate mortgage to buy a property, you benefit from stable interest rates over the long term. But how is this rate determined in the first place? The terms and conditions of this type of loan depend on a number of parameters:

– The state of the financial market, i.e. current interest rates.

– The borrower’s income: a high income provides additional security for the bank, and results in a lower rate.

– The term of the loan: the shorter the term, the lower the interest rate, and vice versa.

– The conditions set by each financial institution: banks can charge widely varying rates.

Why is a fixed-rate mortgage so attractive?

The main advantage of a fixed-rate mortgage is its stability. Because the interest rate is set in advance, you are protected against market rises that would automatically increase your interest costs. What’s more, as interest and charges remain unchanged throughout the repayment period, your budget is known in advance: you can calculate your charges accurately over several years, without fear of any nasty surprises. This type of mortgage is therefore tailor-made for people who value their financial stability.

Another advantage: with a fixed-rate mortgage, you can opt for the indirect amortisation mechanism. With significant tax benefits: not only is the mortgage interest tax-deductible, but so are the payments made into the pension plan.

Finally, this loan model offers the possibility of determining the rate of the next mortgage in advance – this is known as a “forward mortgage”. In practical terms, you can set the interest rate up to 12 months before the amount borrowed is paid out, for example if market rates fall. Additional charges may be applied by the bank.

What are the limits of a fixed-rate loan?

The advantage of a fixed-rate mortgage is also its major disadvantage: because the interest is fixed in advance, you are protected against a possible rise, but without benefiting from a period of fall. You are “locked in” for the entire term of the loan.

What’s more, once your mortgage has expired, you need to re-evaluate your financing. Depending on the market, you may get a lower rate… or a higher one. However, this risk can be minimised by staggering your mortgages: a solution that involves dividing the entire financing between several mortgage tranches with different contractual terms.

Finally, this type of mortgage generally incurs significant costs in the event of early repayment or cancellation. The amount varies according to a number of factors, such as the remaining term of the loan and the agreed interest rate. In some cases, the long duration of the mortgage becomes a disadvantage: if you need to sell the property because of a change in your family or profession, you will have to pay high charges.

In conclusion, while the fixed-rate mortgage is the most common and most protective financing model for Swiss borrowers, it is not necessarily the most appropriate solution in every case. To find out whether this type of loan is right for you, discuss your property plans with your broker.