Development of a mortgage guide for firsttime home buyers in Switzerland
The goal of this thesis was to find out how a homeowner best structures their mortgage based on their risk profile and expected developments of interest rates. This was achieved through the development of a mortgage guide for profiles with low, moderate, and high risk capability.
Since 80% of Swiss people who would like to buy real estate are not able to afford it, it is crucial to have a financing structure that fits the borrower’s individual needs once that dream can be fulfilled. Additionally, since the end of the LIBOR era, the SARON mortgage is a newly established product which is not easy to understand for the average borrower.
The development of the guide is based on theoretical research about the SARON interest rate, and analysis of selected banks regarding their SARON and fixed-rate mortgage offering. The different risk profiles are based on statistical data and guidelines by the Swiss Bankers Association stating what factors the bank needs to consider in their mortgage approval. Based on data published by the Swiss National Bank and SIX Group AG, who publishes the SARON interest rate, calculations were conducted for different mortgage structures in different interest rate scenarios, which were then compared to the limits of each risk profile.
The calculations demonstrate that in an environment with high interest rates, short-term and SARON mortgages are the most affordable option and allow the borrower to profit from sinking interest rates in the future. In an environment with low interest rates, a borrower with a low risk profile is best advised to fix the low rates for a long term, while someone with a bigger risk capability might consider a SARON or short-term mortgage to achieve lower total payments over time, or to allow for the switch into a fixed-rate mortgage at a lower rate. The calculations also demonstrate the risk of a SARON mortgage for low and medium risk profiles in an environment with high volatility. Furthermore, the calculations show that splitting up the mortgage into tranches with different durations lowers the overall interest rate risk in case of a renewal. This however means that the borrower has less flexibility in switching banks in case there is a more favourable offer available.
Ultimately, the conclusions of the theoretical input and calculations were combined into recommendations for each risk profile, combined with information about the SARON interest rate and mortgages where it is part of the recommendation. A questionnaire to help with self-assessment of the correct risk profile was designed to further support borrowers in their decision-making process.