The devil's in the detail: Pros and cons of repaying a Swiss mortgage early

As interest rates rise, many buyers and owners give in to temptation and try to conclude financing as quickly as possible. However, this time pressure may take its revenge, because in mortgage contracts, as Luca Randolfi, CEO and Managing Partner of feyn mortgage brokers explains, the devil is in the detail.

Many mortgage borrowers are being persuaded that interest rates will continue to rise and, therefore, long-term maturities must be chosen in order to hedge against costs rising further. This argument cannot be countered as fixed-rate mortgages have the advantage that the interest costs can be planned for in advance. They can also be fixed in anticipation, which means additional planning security.

Do fixed-rate mortgages also mean security against life-changing situations?

It can often happen that drastic events such as serious illness, disability, death, divorce, or even unplanned relocation lead to the forced sale of a property. In such cases, the mortgage must either be transferred to the new buyer or - which is much more often the case - be fully repaid. In the case of long-term residual terms, this can trigger an early repayment penalty, which can be very expensive depending on the interest rate situation. 

How do mortgage providers calculate early repayment penalties?

Early repayment penalties are based on the current refinancing situation, the associated service charges and the margin lost by the lending institution. Depending on the size of the mortgage, the costs of exiting can easily reach six figures and are unfortunately rarely negotiable.

When calculating the size of the early repayment penalty, most lending financial institutions use a similar formula: the interest payments that would have accrued during the time remaining on the mortgage are added up. From this, the lending institution deducts the reinvestment interest rate that it could obtain for investing the repaid mortgage on the money or capital market. In addition, there are often administrative fees.

In the end, the sum of these three factors is the total prepayment penalty, whereby most banks exclude payment to the customer (if the reinvestment interest would compensate for the interest payments).

It is extremely important to find the optimal financing partner

How can early repayment penalties be reduced or avoided?

By selling a property with an existing mortgage, there is, theoretically, the possibility of avoiding the early repayment penalty. Although the seller has the option of stipulating that the takeover of the mortgage is a condition, whether the buyer and / or the lending institution accept this condition and want to take over the financing is not a certainty. 

If the seller is already planning to buy a new property in Switzerland, the mortgage can ideally be taken over. In such a case, the old mortgage is transferred to the newly acquired property. Whether this option is possible in the case of a sale and simultaneous purchase must be clarified with the respective institution, since the financial viability and the loan-to-value ratio are recalculated for the new financing situation.

Consequently, the choice of the optimal mortgage and the optimal financing partner is also a question of the rules governing the early repayment penalty. The lending institutions have different ways of calculating this, including waiving it (if the property is sold to parties outside the family). Knowing these differences means doing a lot of research and thus investing a lot of time.

Taxes and costs involved in buying a house varies by canton

Besides the potentially expensive early repayment penalty, the choice and amount of amortisation, imputed rental value tax, cantonal differences when buying a property and divergences in valuation methods must also be taken into account. Some of the differences are nominally marginal, but in real terms, they can have a major financial impact. So, the devil is in the detail here too. Due to the challenges mentioned above, it is therefore extremely important to find the optimal financing partner.

In Switzerland, independent brokers like feyn are ideally suited for this purpose, as they do not have to deal with conflicts of interest thanks to their independence, meaning they can always safeguard the needs of their clients. In addition, professional and independent brokers know the relevant differences and can thus offer the client great financial added value.