Loan rates determination

 

In order to understand how mortgage providers come up with rates , it is important to understand the principles behind it.

 

Banks, by far the largest mortgage providers in Switzerland, have 2 choices to put a mortgage loan at your disposal :

 

  • Use their clients savings
  • Borrow the money on the money market

 

Insurance companies, pensions funds and other private entities will use their clients capital or their own assets. They will keep a close eye on what banks are offering, but could greatly differ from it, depending on their need to do mortgages or not.

 

Because they are the biggest actor on the market, bank rates are the reference. Usually, insurance companies, pensions funds and private entities will try to have better rates, in order to attract new clients.

 

The reference rate (Swap) :

 

The Swap rate is the rate applied to mortgage providers borrowing money on the money market. If you were to request a loan with bank X, the bank will most likely look to borrow all or part of the loan amount on the money market. If the bank borrows at a rate of 0.5% for 10 years, a mortgage loan offer around 1.5% will be given to you, in order for the bank to cover a 1% margin.

 

Swap rates change everyday, so comparing your mortgage loan offer to the one your friend received a few months earlier is not advised.

 

Below, the progression of the swap rate from January 6th 2012 to January 6th 2022:

 

 

As you can see, the swap rate is volatile.

 

If bank X was looking for a 1% margin, this is the 10 years rate you would have obtained :

 

06.01.2012 : Market rate 1.21% + bank margin 1% = 2.21%

06.01.2014 : Market rate 1.57% + bank margin 1% = 2.57%

06.01.2016 : Market rate 0.14% + bank margin 1% = 1.14%

06.01.2018 : Market rate 0.28% + bank margin 1% = 1.28%

06.01.2020 : Market rate -0.18% (bank would consider it a 0% loan) + reduced bank margin 0.9% = 0.9%

06.01.2022 : Market rate 0.23% + bank margin 1% = 1.23%

 

If requested, we will gladly provide you with links allowing you to follow closely the swap rate.

 

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