Navigating the Swiss mortgage market: A guide to understanding interest rates and terms

Swiss mortgage rates are among the lowest in the world due to conservative monetary policy, strict affordability rules and a unique two-tier lending system. Understanding how these elements interact helps borrowers choose the right mortgage type and avoid costly mistakes over time.

Swiss mortgage rates are low, but borrowing in Switzerland is anything but simple. Before choosing between fixed-rate and SARON mortgages, borrowers need to understand how rates are set, why banks apply a 5% stress test and how Switzerland’s two-tier mortgage system works. This guide explains the key drivers behind Swiss mortgage rates, compares the main mortgage types and outlines the strategic decisions that can save borrowers tens of thousands of francs over the life of a loan.

A two-tier structure with long-term debt

Swiss mortgages follow a distinctive two-tier model. Banks generally finance up to 80% of a property’s value, split into:

• A first mortgage, covering around 65–67% of the property value, which does not require mandatory repayment
• A second mortgage, covering the remaining portion up to 80%, which must be amortised within 15 years or by retirement age, whichever comes first

This structure means many Swiss homeowners carry mortgage debt for decades, sometimes for life. Historically, this was encouraged by tax rules allowing mortgage interest to be deducted while homeowners paid tax on an imputed rental value if their property was debt-free. Although tax reforms are gradually reducing these incentives, the cultural norm of long-term mortgage debt remains firmly embedded.

Strict affordability and equity requirements

Swiss banks apply some of the most conservative lending standards in Europe. Buyers must provide at least 20% equity, with a minimum of 10% coming from personal savings rather than pension assets.

Affordability is assessed using a stress rate of around 5%, not the current market rate. Banks calculate whether total housing costs, including interest, amortisation and maintenance estimated at around 1% of the property value, stay below one-third of gross household income.

For a CHF 1’000’000 property financed at 80%, banks assume roughly CHF 40’000 in annual interest at 5% plus maintenance and amortisation. This often requires household income well above CHF 150’000. While demanding, this approach explains why Switzerland’s mortgage default rate remains below 1%.

Combining mortgage products to manage risk

Many borrowers split their mortgage into multiple tranches, mixing fixed and SARON products or staggering maturities. For example, one portion might be fixed for 10 years while another remains SARON-based.

This strategy reduces the risk of refinancing the entire mortgage at an unfavourable time and allows borrowers to balance stability with flexibility. The trade-off is increased complexity and reduced ease when switching banks.

Fixed-rate mortgages, certainty with limited flexibility

Fixed-rate mortgages lock in an interest rate for a defined period, typically between two and 10 years, although some lenders offer longer terms. During this period, the rate remains unchanged regardless of market conditions.

Short-term fixes usually offer lower rates but expose borrowers to refinancing risk sooner. Longer terms provide cost certainty and protection against rising rates, particularly attractive when rates are historically low.

The main drawback is inflexibility. Ending a fixed mortgage early can trigger substantial penalties, often amounting to tens of thousands of francs. These penalties compensate the bank for lost interest and are calculated based on the remaining term and the difference between the contracted rate and current market rates. Fixed mortgages suit borrowers who value predictability and expect to hold their property long term.

SARON mortgages, flexible but exposed to rate changes

SARON mortgages are Switzerland’s standard variable-rate product. SARON, the Swiss Average Rate Overnight, reflects overnight interbank lending rates and closely follows Swiss National Bank policy.

A SARON mortgage combines the SARON index with a fixed bank margin, usually between 0.6% and 1%. If SARON is 0.5% and the margin is 0.8%, the total rate is 1.3%. Rates adjust periodically, typically monthly or quarterly.

The advantage is flexibility. Many SARON mortgages allow conversion to a fixed rate without penalty and can usually be terminated with notice rather than expensive break fees. During prolonged low-rate periods, SARON mortgages have often been significantly cheaper than fixed alternatives.

The risk lies in volatility. When the Swiss National Bank raised rates sharply in 2022–2023, SARON borrowers saw their costs rise quickly. SARON mortgages suit borrowers with financial buffers who can tolerate short-term fluctuations.

Traditional variable rates, flexibility at a premium

Some banks still offer traditional variable-rate mortgages with no fixed term. These provide maximum flexibility and can often be terminated with a few months’ notice. However, rates are typically around two percentage points higher than SARON mortgages, making them expensive for long-term use.

They are best suited as short-term solutions, such as bridging finance between property transactions, rather than as permanent financing.

Combining mortgage products to manage risk

Many borrowers split their mortgage into multiple tranches, mixing fixed and SARON products or staggering maturities. For example, one portion might be fixed for 10 years while another remains SARON-based.

This strategy reduces the risk of refinancing the entire mortgage at an unfavourable time and allows borrowers to balance stability with flexibility. The trade-off is increased complexity and reduced ease when switching banks.

Duration and notice periods

Fixed mortgages specify clear terms, commonly two, five or 10 years. SARON mortgages may run indefinitely but often include notice periods for termination. 

Understanding these conditions is essential, especially if personal circumstances change.

Direct versus indirect amortisation

Second mortgages must be amortised, either directly or indirectly:

• Direct amortisation reduces the loan balance over time, lowering interest costs but reducing tax deductions
• Indirect amortisation involves paying into a pledged pillar 3a account while keeping the mortgage balance unchanged, preserving interest deductions and building retirement savings

Indirect amortisation can be tax-efficient for higher earners, although future tax reforms may reduce its advantages.

Early termination penalties

Fixed-rate mortgages often impose significant early repayment penalties. SARON and traditional variable mortgages are generally more flexible, allowing termination with notice and minimal fees.

Borrowers expecting relocation or other life changes should prioritise flexibility over marginally lower rates.

Choosing between fixed and SARON

The decision depends on risk tolerance and financial resilience. Fixed mortgages offer certainty, while SARON mortgages can reduce costs if rates remain stable or fall. Many borrowers split their mortgage to hedge against uncertainty.

Staggering maturities

Staggering mortgage maturities reduces refinancing risk but can complicate bank switching. This strategy suits borrowers planning long-term ownership.

Avoiding common mistakes

Focusing solely on the lowest rate often leads to problems later. Flexibility, penalties and personal risk tolerance matter just as much. Rate forecasting is unreliable, so balanced strategies tend to perform best.

The content in this article is provided for educational purposes only. It does not constitute investment advice, financial recommendations, or promotional material.