Variable-rate mortgage: A highly flexible financing model

The variable-rate mortgage is one of the classic financing models for buying a property in Switzerland. It differs from a fixed-rate mortgage in that it is highly flexible: the rate and term are not fixed when the mortgage is taken out, there is no minimum amount or time limit, and it is possible to cancel or change the mortgage model at any time. How does this type of loan work? Is it the right solution for your property project in Switzerland?

How does a variable rate mortgage work?

Unlike a fixed-rate mortgage, where the interest remains constant throughout the term of the loan, the amount of interest on a variable-rate mortgage changes over time. This is because the mortgage rate adapts to market conditions, and therefore to any fluctuations. What’s more, this type of loan has no fixed term (unlike a Saron mortgage, where the rate also varies) and no minimum amount, and is often taken out for short periods of between 3 and 6 months. This makes it the most flexible financing model.

Nevertheless, it is also the least common type of loan in the Confederation today, whereas it was favoured some twenty years ago. This turnaround can be explained by a change in the reference index. Previously, the variable rate was used as the basis for calculating the rental rate, and was kept low for political reasons. In 2008, the method of calculation changed: the Swiss National Bank’s refinancing rate was used as the benchmark for the rental rate. Since then, financial institutions have been free to set the mortgage rate at their own discretion.

How does the variable mortgage rate change?

By “variable rate”, we mean that the interest rate is adjusted individually by the bank in line with capital market conditions. So by taking out a variable-rate mortgage, you assume the risk of market fluctuations:

• If the interest rate falls, so does yours, and your mortgage interest will fall.
• If the interest rate goes up, so does yours, and you have to pay more interest.

This is both an advantage – in the first case – and a disadvantage – in the second. Even so, rate fluctuations remain moderate overall. Between March 2021 and February 2024, the variable rate rose from 2.62% to 2.89%, reflecting a moderate increase. By comparison, over the same period, the fixed rate rose from 1.32% to 2.46%, with a maximum of 3.86%, and the Saron rate rose from 0.9% to 2.59% between January 2022 and February 2024 (source: Money Park).

Another point to bear in mind is that the rate applied by financial institutions to a variable-rate mortgage is the same for most customers. This means that the specific characteristics of each applicant (solvency, financial capacity, debt ratio, equity capital) play almost no part in setting the rate.

Why choose a variable rate mortgage?

Variable-rate mortgages offer flexibility in a number of ways:

• There is no minimum amount to borrow, so you can take out a mortgage for small sums of money.
• There is no fixed term, which makes it easier to terminate (subject to the agreed notice period), for example if the property being financed is sold. With other types of mortgage, cancellation costs can be very expensive.
• Youcan repay the loan at any time, directly or indirectly.
• Option to convert to a fixed-rate mortgage or Libor mortgage at the end of each month.

And, of course, there’s another advantage: if market rates fall, your mortgage interest will fall too… Even if the lack of transparency in the way mortgage rates are calculated by financial institutions means that interest often falls less quickly than the rate itself (compared with a Libor or Saron mortgage).

The disadvantages of a variable-rate mortgage must also be taken into account:

• If interest rates rise, your mortgage interest will automatically increase.
• It’s difficult to plan the cost of the loan over time.

Variable-rate or fixed-rate mortgage: which is better?

There really is no one solution that is better than another: the right choice depends on your personal situation and the nature of your project.

The great freedom afforded by a variable-rate mortgage is ideal if you are planning to sell the property in the near future and are taking on the risk of rates rising during that period. The advantage is that you can adapt your mortgage to your changing circumstances. A fixed-rate mortgage, on the other hand, offers greater stability and makes it easier to plan costs. Finally, note that it is also possible to combine the two financing models – variable-rate and fixed-rate mortgages – over different terms. Talk to your real estate broker.