When buying a home, what is better: a fixed-rate mortgage or a variable-rate mortgage?

The agony of choice: Fixed-rate mortgage or variable-rate mortgage in direct comparison

To make an informed decision, you need to understand how both models work. It's a trade-off between "paying an insurance premium" (fixed) and "bearing the risk" (variable).

Fixed-rate mortgage: The price of security

If you choose the fixed-rate mortgage over the variable- rate mortgage, you are buying a budget guarantee.

• How it works: You freeze the interest rate for a defined period (usually 2 to 10 years, sometimes up to 15 years). Regardless of whether the global economy booms or crashes: your interest rate remains the same.
• The advantage: You know exactly what you'll pay in five years. This is ideal for families or buyers with a tight budget.
• The downside: This security comes at a price. Banks charge a premium for the interest rate risk they assume. Furthermore, you're bound to the loan. Early termination incurs a hefty prepayment penalty.

In the duel between fixed-rate and variable-rate mortgages, the fixed-rate mortgage is the rock in the surf, but often also the more expensive option over the entire term.

The variable-rate mortgage (SARON): The market's opportunity

On the other side of the decision between a fixed-rate mortgage and a variable-rate mortgage is the flexible model.

• How it works: Your interest rate consists of the base interest rate SARON (which fluctuates daily) and a fixed margin charged by the bank. If the central bank's key interest rate falls, your mortgage becomes cheaper. If it rises, you pay more.
• The advantage: Historically, this model has almost always been cheaper than a fixed-rate mortgage over the last 30 years. You don't pay a risk premium.
• The downside: You bear the full risk. If interest rates double, your costs double. Anyone choosing between a fixed-rate and a variable-rate mortgage needs nerves of steel and a substantial financial cushion.

Budget and risk tolerance: Who can afford what?

The question of whether a fixed-rate mortgage or a variable-rate mortgage is better for you is a question of affordability.

• Scenario A (Tight Budget): If your income is just enough to cover the affordability, and a 1% interest rate increase would put you in a difficult position, you shouldn't speculate. In this case, the answer to fixed-rate or variable-rate mortgage is clear: choose the fixed-rate mortgage. Security is essential.
• Scenario B (Solid Financial Buffer): Do you have a monthly surplus? Can you handle it if the interest rate suddenly jumps from 1.5% to 3.0%? Then, compared to a fixed-rate mortgage, you can take the risk of the variable-rate option to save money in the long run.

The mix: The diversification strategy

Often the decision doesn't have to be an " either-or " one. Many experts recommend a mix when choosing between a fixed-rate mortgage and a variable-rate mortgage .

• You split the mortgage ( tranching ). For example, 50% fixed for 10 years, 50% variable in SARON.
• This way you partially benefit from low interest rates, but have planning security for half of the debt.
• But be careful: Different loan terms tie you to the bank long-term. This limits your negotiating power. Nevertheless, a mix of fixed-rate and variable-rate mortgages is often the best compromise in the dilemma of fixed-rate versus variable-rate mortgages .

Market expectations: The bet on the future

Ultimately, choosing between a fixed-rate mortgage and a variable-rate mortgage is also a bet on interest rate developments.

• Do you expect interest rates to rise sharply? Then secure a fixed-rate mortgage now.
• Do you expect interest rates to fall or remain the same? Then a variable-rate mortgage (SARON) is more attractive.

Nobody has a crystal ball. However, anyone who bases their choice between a fixed-rate mortgage and a variable-rate mortgage solely on forecasts is acting speculatively.

Conclusion

The question "What's better when buying a home: a fixed-rate mortgage or a variable-rate mortgage?" cannot be answered with a single winner. Historically, the variable-rate mortgage wins the cost race. Psychologically, the fixed-rate mortgage wins the security race.

Your decision between a fixed-rate and a variable-rate mortgage should depend 80% on your financial situation (risk tolerance) and only 20% on your market assessment. If you want peace of mind and budget clarity, pay the premium for a fixed-rate mortgage. If you have financial flexibility and monitor the markets, a variable-rate mortgage offers opportunities for savings. Often, a combination of both models is the smartest way to reconcile the advantages of a fixed-rate versus a variable-rate mortgage .

If you want to simulate how different interest rate scenarios affect your budget or which mix of fixed-rate or variable-rate mortgage is optimal for your personal affordability, Loft offers neutral calculation tools and market comparisons for your strategy.

Glossary

• Fixed-rate mortgage or variable-rate mortgage: The fundamental decision when financing. A fixed-rate mortgage means a fixed interest rate over a specific term; a variable-rate mortgage (usually SARON) means a market-dependent, fluctuating interest rate.
• SARON (Swiss Average Rate Overnight ): The reference interest rate for the Swiss money market and the basis for modern variable-rate mortgages. It has replaced LIBOR.
• Prepayment penalty: A penalty fee charged by banks if you exit a fixed-rate mortgage early. A significant disadvantage compared to a variable-rate mortgage.
• Tranching : The division of the mortgage debt into several parts with different models (e.g., a mix of fixed-rate or variable-rate mortgage ) or maturities.
• Margin: The bank's fixed markup on the base interest rate (swap for fixed rates, SARON for variable rates). This is the bank's profit.