Significant increase in mortgage interest rates – mortgage interest rate assessment April 2022

The war in Ukraine has already detonated rising global inflation. Price increases threaten to slow economic growth again. Additionally, supply chain problems have returned significantly more acute due to the pandemic, and new coronavirus variants continue to pose a significant risk. It is currently extremely difficult to assess whether we will see a significant turnaround in interest rates with a sustained higher interest rate level. Despite these dangers, economic output in Switzerland has been slightly above its pre-crisis level in recent weeks. Depending on the duration, capital market interest rates increased between 60 and nearly 100 basis points in the first quarter and are now at the levels last seen in mid-2014. Interest rates for fixed-rate mortgages have followed capital market interest rates and are showing a reaction comparable to the rise following the 2015 Swiss franc shock. The difference between the cheapest and the most expensive ten-year mortgage has increased and exceeds one percent.

macroeconomic situation

World trade: Delivery bottlenecks are getting worse again
The Russian war of aggression in Ukraine and the sanctions imposed by the West have recently had a serious negative impact on world economic growth. Supply bottlenecks that have not yet been overcome risk worsening again as a result of the war and at least delaying the return to the pre-crisis level. The energy price situation for private consumers and commercial users is particularly critical.
Although global air traffic has increased since the summer, the number of flight movements has remained around 20% below the pre-crisis level since the beginning of 2022.

Switzerland: Economic product slightly above the pre-crisis level
The real-time indicator of general economic development from the State Secretariat for Economic Affairs (Seco) shows that Switzerland’s gross domestic product (GDP) has remained slightly above its pre-crisis level in recent weeks, but there is no forecast for a further increase. The job market has dealt with Corona excellently, unemployment is still at an all-time low.

War in Ukraine and Corona threaten recovery in 2022
The outbreak of war in Ukraine is likely to have a negative impact on world economic activity. Confidence between consumers and businesses is waning, investments are delayed and energy costs are rising, both privately and commercially.
According to a current forecast from the Swiss National Bank (SNB), economic growth could decline from 3 to 2.5 percent in 2022.
If there were also new restrictions due to the new crown measures, this would put a strain on economic development.

The rate hike stands on shaky ground
Skyrocketing inflation around the world has prompted the world’s leading central banks (particularly the Fed and the ECB) to tighten their expansionary monetary policy. The communications on this were made at the end of 2021, which is why the most recent decisions have not led to further increases in interest rates. In particular, it was the increases in fuel and food prices following the war that further fueled inflation and thus also the medium- and long-term capital market and mortgage interest rates, while the economic outlook became low. at the same time gloomy. This uncertainty limits the monetary authorities’ room for maneuver, which is why we believe the interest rate hike is on unstable ground. It is currently extremely difficult to assess whether we will see a significant turnaround in interest rates with a sustained higher interest rate level.

Evolution of interest rates

Interest rate hike like after the Swiss franc shock in 2015
In the first quarter, standard rates hit the highs we last saw in February 2018. The last time there was an increase of around 50 basis points (bps) in a quarter was after the franc shock Swiss in January 2015. At the time, however, the sharp rise in interest rates was not only due to the increase in capital market interest rates, but also to a widening of banks’ margins. The latter is not currently the case. The rise in capital market interest rates not (yet) fully reflected in mortgage interest rates. Providers behave differently, regardless of whether they are banks, insurance companies, or pension funds, and currently only add part or all of the capital market interest rate increase to mortgages.

Reference rates and maximum rates at the end of March 2022

The difference between the cheapest and the most expensive offer increases
So it’s no surprise that the best suppliers keep making attractive offers. Their two- and five-year mortgages have recently been even slightly cheaper than before the outbreak of the war. The difference between the cheapest and the most expensive provider increases accordingly. With a ten-year life span, it exceeds one percent (134 bps).

Reference rate vs maximum rate at the end of March 2022
Database: rates of over 150 banks, insurance companies and
pension funds on average. Status: 30/03/2022

Capital market interest rates with historical increase
Capital market interest rates recorded a historic rise in the first quarter. The 10-year swap rate increased by nearly 100 bps (1%). The hike began in December 2021 with the Fed’s announcement that it intended to raise interest rates three times in 2022 and was then driven by ever-higher inflation data to a level we last saw in the middle of the year. 2014. The outbreak of the war in Ukraine has meanwhile been able to wipe out about 20 bps of the increase. However, the realization soon prevailed that the explosive rise in inflation can only be contained with higher interest rates.

Capital market interest rates at the end of March 2022
Source: Refinitiv

interest rate forecast

The turnaround in interest rates was also announced for short maturities
After the turnaround in long-term interest rates had already manifested at the beginning of the year, short- and medium-term policy rates have now also risen sharply and are therefore expected to have a higher average in 2022 compared to previous years. About half of the rise in mortgage interest rates in the first quarter is likely to be due to the war in Ukraine. We see this increase on shaky ground, as inflation, which has been further accelerated by the war, could soon turn into an economic drag and thus weigh on interest rates. As a result, we expect mortgage interest rates to move sideways or even slightly lower over the medium term, although further hikes cannot be ruled out in the meantime.

Long-term protection remains attractive
The best offers remain attractive. In particular, the five and fifteen year maturities are still available at very attractive prices. This is suitable for anyone who needs long-term protection in an environment of rising interest rates. To see a decline in mortgage interest rates, capital market interest rates must first fall again. Margins are currently quite small and therefore lower mortgage interest rates cannot be expected if capital market interest rates remain the same or rise.

recommendations

  • Interest rates are likely to remain highly volatile over the coming weeks and months. There is certainly a possibility of falling interest rates and it is therefore important to address the imminent extension of a mortgage at an early stage and then be able to take advantage of the opportunities quickly.
  • Due to the greater difference between the cheapest and the most expensive suppliers, an extensive comparison of suppliers is more important than ever. A few tens of thousands of francs are quickly wasted on a ten-year fixed-rate mortgage.
  • Taking out mortgage financing through a mortgage specialist like MoneyPark is even more useful in the current interest rate environment. The pricing strategies of the various suppliers are currently very different. This situation makes it very difficult for the borrower to find the most attractive offer.

You can find the mortgage interest rate assessment for April 2022 in PDF format here.


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