Zero interest rates, but higher mortgages – the reasons

Context: Zero interest environment, but more expensive mortgages?

Many property buyers are surprised: Despite very low or even near-zero key interest rates, mortgage rates are at a higher level than one would intuitively expect. How does this fit together? The short answer: Mortgages are not pegged 1:1 to the key interest rate. They reflect banks’ sources of refinancing, long-term interest and inflation expectations, risk premiums, regulatory capital requirements, and market dynamics.

This article explains why mortgages can be more expensive in a zero interest environment – and shows how to optimally structure your financing in Switzerland: from choosing between SARON and fixed-rate mortgages, through margin, to loan-to-value, affordability, and amortisation.

At a glance

• Mortgage rates depend not only on the SNB key interest rate, but above all on swap rates, Pfandbrief spreads, bank margins, and risk premiums.
• Fixed-rate mortgages are primarily priced using CHF swaps along the maturity curve; SARON mortgages via the money market (SARON) plus margin and any applicable floor.
• Regulation (e.g. capital and liquidity requirements, countercyclical capital buffer) increases the cost of mortgages and thus the margin requirement.
• Property-, client- and loan-to-value risks lead to individual markups; competition and distribution also influence the conditions.
• Practical tips: Compare offers, negotiate margin, mix structure (SARON/fixed), optimise loan-to-value, check amortization strategy and contract details.

What does 'zero interest' really mean in Switzerland?

'Zero interest' usually refers to a very low or zero monetary policy key interest rate of the Swiss National Bank (SNB) or a short-term money market rate like SARON (Swiss Average Rate Overnight) quoted near zero. However, this does not mean all financing costs in the market are automatically zero:

• SARON only reflects very short-term, secured money market conditions.
• Fixed-rate mortgages are priced along the interest rate curve using CHF swap rates (e.g. 5- or 10-year swaps), which include expectations for future interest rates and inflation as well as term and liquidity premiums.
• Banks also calculate margins and risk surcharges, which can vary independently of the key interest rate.

In short: The key interest rate is only one piece of the puzzle. Critical are the refinancing and the risk/capital tie-up over the entire mortgage period.

How banks price mortgages

Pricing can be represented simply as follows:

• SARON mortgage: Effective interest rate = SARON (usually as a periodic average) + bank margin ± any product markups. Many contracts include a floor for the reference rate (e.g. not lower than 0%), so negative reference rates are not passed on to customers.
• Fixed-rate mortgage: Effective interest rate = corresponding CHF swap rate for the term + margin + liquidity/hedging markups. Banks often hedge fixed-rate mortgages with swaps; the cost of this hedging is reflected in the price.

Additional building blocks:

• Refinancing costs via Pfandbriefe, deposits or capital market (bonds) including spreads.
• The bank's equity costs (required return on tied capital).
• Distribution, advisory and operating costs.

Why mortgages can be higher despite zero rates

1) Long-term interest and inflation expectations (swap curve)

Even if the short-term SARON is near zero, 5- to 10-year CHF swap rates can be significantly higher. Reasons:

• Market expectations of future rate hikes or a normalization over time.
• Term premium: a maturity premium compensates for interest rate lock-in risks.
• Inflation expectations: Even in Switzerland they play a role in the curve, even if only moderately.

Result: Fixed-rate mortgages are not 'free' just because key interest rates are low. They reflect the entire interest rate expectation over the lock-in period.

2) Risk premiums and bank margins

Banks price in risks, which can even increase in a zero interest environment:

• Credit risk: With uncertain economic prospects or high real estate prices, the potential loss level increases.
• Property and location quality: Second homes, investment properties or special buildings often bear higher premiums than owner-occupied residential property in a central location.
• Customer profile: Income, stability, type of employment, and debt level influence the margin.
• Loan-to-value (LTV): From around 65% LTV the risk profile increases; above 80% mortgages are generally not permitted. Higher LTV leads to higher margins.

3) Refinancing via Pfandbriefe and capital market

A large proportion of mortgages in Switzerland are refinanced through Pfandbrief institutions. Their yields are linked to:

• CHF interest rate curve (swaps/government bonds)
• Pfandbrief spreads (credit and liquidity premiums)
• Market situation and investor demand

If the spread widens – for example due to higher market volatility – refinancing becomes more expensive even without a change in key interest rates.

4) Regulation and capital tie-up

Capital and liquidity requirements (e.g. Basel III/IV, LCR, NSFR) as well as the countercyclical capital buffer increase capital tie-up for mortgages. Equity is expensive for banks; the required return on tied-up capital flows into pricing as a margin component. There are also specific Swiss guidelines on affordability and amortization requirements that shape the business model.

5) Liquidity and volatility premiums

In periods of high interest rate volatility, hedging costs increase. For fixed-rate mortgages, hedging against early terminations (prepayment or early repayment risk) can become more expensive. Even liquidity premiums – compensation for tying up capital long-term – can remain relatively high in a zero interest environment.

6) Contract design: floors and product features

Many SARON mortgages have contractual floors for the reference rate. If SARON falls below 0%, the interest component remains at 0%, and the margin is added on top. Result: The effective customer rate remains positive. Additional features such as caps, fixed switch options or payment frequencies may include further premiums.

7) Competition, distribution and cross-subsidization

Mortgage margin is not only risk-based, but also a market price. In regions or segments with less competition, premiums tend to remain higher. Conversely, aggressive online providers may offer lower prices – but often with stricter criteria or less flexibility in contract design.

What does this mean for SARON vs. fixed-rate mortgages?

• SARON mortgage: Profits directly from low money market rates. The margin, however, is crucial – and floors limit the benefit if the reference rate is negative. The interest burden also fluctuates; budget discipline and an understanding of interest rate risk are necessary.
• Fixed-rate mortgage: Locks in the interest rate for several years and is based on the swap curve. Even with a zero policy rate, a fixed-rate mortgage can be significantly more expensive when market participants price in future interest rate hikes or the term premium is elevated.
• Mixed strategy: Many homeowners split the mortgage into tranches (e.g. SARON + 5-year fixed) to balance cost and planning security.

Affordability, loan-to-value and amortisation – what remains important?

Regardless of market interest rates, conservative standards apply in Switzerland:

• Affordability: Banks calculate using a notional interest rate (typically 4.5–5%), plus 1% ancillary costs and amortisation. This is used to check whether housing costs are still affordable even with higher rates (rule of thumb: max. about one third of gross income).
• Loan-to-value: Maximum 80% of the purchase price/market value. The 2nd rank (over 65%) must generally be amortised within 15 years or by retirement.
• Own funds: At least 20%, of which a minimum portion must be 'hard equity' that may not come from the 2nd pillar. 3a pension funds can be used for indirect amortisation.

These guardrails remain decisive for terms and lending decisions even in a zero interest environment.

Practical tips: How to optimise your mortgage in a zero interest environment

1) Compare offers and mandate professionally

• Obtain at least two to three offers (bank, insurance, pension fund, online provider).
• Compare not just the rate, but also margin, floors, fees, termination rights, refinancing costs, and service quality.

2) Negotiate the margin – with substance

• Lower the loan-to-value (e.g. additional equity), ideally towards 65% or lower.
• Disclose stable income, low expenditure ratio and clear documentation.
• Check whether “green” discounts are available for energy-efficient properties (energy certificate, renovation plan).

3) Choose structure wisely

• Mixed solution: one tranche as SARON mortgage for cost benefits at low money market rates, another as a fixed-rate mortgage for planning security.
• Stagger maturities (laddering) to spread refinancing risk and average interest rate levels over time.

4) Know the contract details

• Watch for reference definition (SARON average period), floors, interest rate adjustment frequencies, and cap options.
• Check prepayment compensation for early termination of fixed-rate mortgages and the rules for tranche conversions.

5) Optimize amortisation strategy

• Direct amortization reduces the debt and thus interest costs immediately.
• Indirect amortization via pillar 3a can be advantageous for tax purposes; in this scenario, the mortgage remains constant and the 3a balance is later used for repayment.

6) Use forward options selectively

• If you want to secure future fixed rates, compare forward premiums and commitment periods. Check whether flexibility (e.g. conversion rights) justifies the markup.

7) Stress test your home budget

• Calculate your housing costs at 4.5–5% interest plus ancillary costs. This way you avoid surprises if the interest environment changes.

8) Property and sustainability

• Investments in energy efficiency (insulation, heating, PV) can lower operating costs and support resale value – some institutions reward this with lower margins.

9) Plan refinancing sensibly

• Check regularly whether refinancing or re-tranching adds value. Consider all fees, forward costs and any taxes.

10) Obtain independent advice

• Complex cases (e.g. self-employment, investment property, condominium with need for renovation) benefit from an independent second opinion.

Frequently Asked Questions (FAQ)

• Why doesn't my mortgage rate track the SNB key interest rate 1:1? Because fixed-rate mortgages are determined by the swap market and SARON mortgages are influenced by margin, floors, and product design. In addition, Pfandbrief spreads, capital and liquidity costs matter.
• Is a pure SARON mortgage not always cheapest in a zero interest environment? Often yes in the short term, as long as the margin is attractive and there is no restrictive floor. However, you bear the interest rate risk. A mixed strategy can improve the risk/return profile.
• Why is my fixed-rate mortgage expensive even though the SNB is loose? The swap curve may price in a future tightening or higher term premiums. Banks also add hedging and capital tie-up costs.
• Do banks pass on negative interest rates to me? Generally not. Many contracts set floors at 0% for the reference rate component. The margin remains payable in any case.

Conclusion

'Zero interest' does not mean 'zero cost' for mortgages. The key factors are the mechanics of pricing (SARON, swap curve), refinancing via Pfandbriefe, risk and liquidity premiums, and regulatory requirements. Those who cleverly structure their financing, negotiate the margin, optimize loan-to-value and affordability, and carefully review contract details can achieve sustainable terms even in a zero interest environment. For many, a combination of SARON and fixed-rate mortgages, supplemented by a carefully considered amortisation strategy, is suitable.

Further sources

• Swiss National Bank (SNB): Monetary policy, policy rate and SARON information – https://www.snb.ch/