EXPLAINED: What is Switzerland’s ‘SARON’ mortgage?
If you’ve got a mortgage in Switzerland or you’ve been reading up on getting one, you’ve probably seen the term ‘SARON mortgage’. But what does it mean and how does it differ from other mortgage systems you might be aware of?
Switzerland’s unique mortgage system can be difficult to work out.
These complications are at least partially behind the country’s low home-ownership rate. Switzerland is the only country in central or western Europe where fewer than 50 percent of people own their home.
As we’ve covered previously, the system is so complex and unique that a majority of mortgage holders do not actually pay back their mortgage - and benefit by doing so.
Another complex shift took place in 2022, when the SARON mortgage replaced the LIBOR mortgage in Switzerland.
Here’s what you need to know.
What is the SARON mortgage in Switzerland and how does it differ from the LIBOR mortgage?
Comparatively unique to Switzerland is the SARON (Swiss Average Rate Overnight) mortgage.
This is not a fixed-rate mortgage.
Instead, the rate of the mortgage is calculated according to the SARON rate, which can change daily.
The rate you pay on a SARON mortgage is the SARON interest rate and a markup added by the lender.
If the SARON rate is negative, then unfortunately you do not get paid by the bank.
Instead, the effective SARON rate will be zero and you will need to pay only the markup.
SARON or LIBOR: Which is better?
This is largely a moot point as the SARON mortgage has replaced the LIBOR one, meaning you do not have a choice between the two.
The SARON mortgage replaced the LIBOR mortgage (London Interbank Offered Rate) at the start of 2022.
The interest rates for SARON mortgages are variable and are calculated on the basis of the SARON reference rate.
The SARON reference rate takes into account actual transactions in the Swiss money market.
Conversely, the LIBOR rate was calculated on the basis of recommendations from a handful of banks.
The major benefit of this rate is that it is believed to be more transparent.
Swiss financial advice site Moneyland points out that LIBOR had links to the "unsecured money markets" and "the SARON is considered to be less vulnerable to manipulation and more resilient to crises than the LIBOR".
What option is best for me?
While you will not have a choice between SARON and LIBOR, in many cases you will be able to choose between a SARON or a fixed rate mortgage.
Whichever one of those is best will obviously depend on your personal circumstances, including your income, the purpose of the house, your intended period for repayment, the size of the mortgage and a range of other factors.
Currently, as rates are low, you’ll benefit from a SARON mortgage, rather than a fixed rate one, although if rates rise significantly then you’d likely be wishing you had fixed your rates.
In many cases, your bank or lender will allow you to convert your mortgage from fixed rate to SARON (or vice versa).
More information about how to save on a mortgage in Switzerland is available at the following link.
Please keep in mind that this was written as a guide only and should not take the place of qualified financial advice.