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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?

Buying a home in Switzerland or thinking of refinancing your mortgage? Here's what you need to know. Image: Pexels
Buying a home in Switzerland or thinking of refinancing your mortgage? Here's what you need to know. Image: Pexels

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. 

EXPLAINED: Why not paying off your mortgage in Switzerland can save you money

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. 

EXPLAINED: How to save on your mortgage in Switzerland

Please keep in mind that this was written as a guide only and should not take the place of qualified financial advice. 

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COST OF LIVING

Seven products that are becoming more expensive in Switzerland

Covid and the war in Ukraine, coupled with rising inflation, made Switzerland even more expensive than it already was before. These are some of the goods you can expect to pay more for.

Seven products that are becoming more expensive in Switzerland

The good news — if we can call it that — is that inflation rate in Switzerland, which stood at 2.6 percent in April, is significantly lower than in neighbouring France (5.4 percent) and Germany (7.8 percent), as well as throughout much of Europe.

However, Swiss consumers are already feeling the increase in prices of many common purchases.

News platform Watson has listed seven goods and services that now cost more, basing its analysis on the national index of consumer prices (LIK), which measures the inflation of consumer goods in Switzerland.

Among the products that are now more expensive are:

Raw materials

Energy prices, including petrol, oil and gas, have increased in recent weeks. “We are currently paying around 77 percent more for heating oil compared to January 2019”, according to Watson.

A litre of petrol currently costs 2.05 francs, versus 1.60 francs in August 2021.

“A recovery is currently not in sight”, Watson added.

READ MORE: How Covid, Ukraine and energy costs are changing Swiss spending habits

Wood

Wood prices started to go up already during the Covid pandemic in 2020, rising by staggering  500 percent from May 2020 to May 2021.

One of the reasons is that wood pellets can also be used for heating.

“The war has not only made the raw material more expensive, but also the production of the pellets”, according to Andreas Keel, Managing Director of Holzenergie Schweiz, who added that in October a tonne of pellets cost 280 francs, and in January it rose to 360 francs.

What certainly doesn’t help matters is that Russia is one of the world’s largest wood exporters and the sanctions currently in place against this country are exacerbating this shortage.

READ MORE: Switzerland extends sanctions on Russian assets

Furniture

If you are looking for a new sofa, table or another piece of furniture, now is not a good time to purchase them, as their cost has risen by around 15 percent. One reason, as stated above, is the higher price of wood, but there are other contributing factors as well.

“The Swedish furnishing giant Ikea increased its prices by an average of 9 percent at the end of 2021. With a market share of 11 percent, Ikea is one of the big players in Switzerland”, Watson said.

Food

While food amounts to only 6.3 percent of an average household budget, it is probably the most important, as nobody can live without it.

The main reason for the increase is that Ukraine exports foodstuffs such as grain, which affects not only prices of products like baked goods and pasta, but also the cost of animal feed — the latter being essential for the production meat and dairy.

Clothing

Clothing prices typically increase in April / May, but this year they rose more than usual.

The war and Covid-related delivery issues are main factors, but the worst is yet to come, according to Andreas Bartmann, vice-president of  the industry association of textile retailers.

“In the fall, [price hikes] will hit us massively,” he said.

READ MORE: How to protect your savings against inflation in Switzerland

Transportation

“Anyone who wants to buy a new car currently has to pay around 10 percent more than in January 2019”, Watson said.

And this increase is likely to continue, mainly due to higher costs of  raw materials and general delivery problems.

Opting for the used-car market is not a solution either, Watson noted, as “the prices there rose even more significantly than for new cars due to the excess demand”.

You could opt for a new motorcycle or bike, but there too prices are expected to climb — also due to shortage of raw materials and delivery bottlenecks.

Travel

Now that Covid restrictions have been lifted in most countries, foreign travel may remain inaccessible for many people anyway,  because it became more expensive.

One major reason is that, with fuel now costing more, airlines are increasing the price of tickets.

By the same token, the price of petrol could make driving to your holiday destination costlier as well.

Your best bet may be to just stay home. It will feel like 2020 all over again, but without the masks.

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