What is a deferred mortgage?


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Even today, investing in property remains a safe haven in Switzerland. To become a homeowner, a mortgage is an ideal solution, allowing you to benefit from tax advantages. Pledging the property is also a real asset, which can enable you to obtain bank financing for 80% of the project.
To get the most out of a mortgage, the best thing is to find an attractive rate. As these are subject to market fluctuations, deferred-effect mortgages can give you a good deal!

Definition of a fixed-rate mortgage

A mortgage is a loan that enables you to buy a property. To secure your bank, you simply offer the purchased property as collateral. In exchange for the loan, you repay the capital combined with interest.
The interest rate associated with your contract can be fixed. You'll then know what interest rate to pay monthly, until the end of the loan. This solution is ideal for those who wish to anticipate precisely the charges relating to their real estate investment.
This is often contrasted with the variable-rate mortgage. With this second formula, your rate is revised regularly, in line with market trends. In other words, if interest rates rise, so do your loan charges. On the other hand, if rates fall, you'll save money. In recent years, people who have chosen the variable rate have generally been winners.

How does the deferred-effect mortgage work?

The deferred-effect mortgage, otherwise known as a forward mortgage, is a type of fixed-rate mortgage. Let's assume that current market rates are attractive. But you only want to invest in a few months' time, without the certainty of benefiting from such an attractive interest rate. In this case, you could opt for a deferred mortgage.
An agreement with your bank allows you to lock in this interest rate over a defined period. For example, you can choose to lock in the current rate for 18 months, to ensure that you can invest with such an attractive interest rate in just over a year's time. The gamble is a real winner, if between the time you lock in the rate and the time you subscribe, interest rates rise.

How long can I keep a deferred-effect fixed rate?

A deferred-effect mortgage does not allow you to lock in a fixed rate for an indefinite period. In general, banks offer to lock in the current rate, for a maximum of 24 months. However, more and more lenders are offering to lock in current rates for up to 3 years. This offers great prospects, so you can invest in anticipation of rising market rates.

How much does a deferred-effect mortgage cost?

To take advantage of the deferred-effect mortgage privilege, the locked-in interest rate will be slightly increased. The calculation is therefore complex, to ensure that despite this increase, you will retain an interest rate that is more attractive than that of the future market.
This interest rate mark-up corresponds to a safety margin taken by the bank. It can be negotiated by you.

When should you use a deferred-effect mortgage?

Anticipating rising interest rates

As you can see, the deferred-effect mortgage is primarily used to anticipate rising interest rates. As an individual, you may not recognize the indicators that tell you that rates are on the rise again. That's why it's vital to enlist the help of a financial advisor. For example, he or she can tell you how long you should lock in an interest rate.

Take advantage of falling property prices

In general, when credit interest rates rise, there are fewer buyers. With an equal or greater offer, it's therefore possible for property prices to fall. By ensuring that you maintain an attractive rate, you can potentially take advantage of this opportunity. Here too, the advice of financial experts is useful in anticipating trends.

Making a rental investment

Low interest rates are very conducive to rental investment. Average profitability for this type of investment is between 4% and 6%. If you've managed to obtain a deferred effect on a lower rate than those prevailing on the market, you'll be able to increase your profitability.

The deferred-effect mortgage for a mortgage buyback

Plan the extension of your mortgage

You can also use the deferred-effect mortgage, to plan the extension of your mortgage. At the end of your commitment, you can repay the outstanding capital in full. You also have the opportunity to extend your mortgage with your bank or another lending organization.
Having locked in an attractive rate in advance therefore represents an opportunity to save money on your extension.

Advantages of changing bank

It should also be remembered that changing bank is often unavoidable, to take advantage of the best possible conditions when buying a mortgage or extending one. For example, you can take advantage of certain discounts offered exclusively to new customers. Putting several lenders in competition with each other also enables you to negotiate your rate or loan terms.

Beware of penalties

Beware, in the event that you redeem the mortgage before its maturity date, you may have to pay penalties. These are taught in the contract you signed when you took out your mortgage. They allow the bank to be able to compensate for the loss of income caused by early amortization.
So, before you ask for a mortgage buyback, you need to ask yourself about the savings you're actually making. Your calculation must take these penalties into account.

View on the deferred-effect mortgage in 2024

In February 2022, the rise in rates has exceeded the forecasts of the European Central Bank. Nevertheless, the strength of the Swiss franc seems to offer the country some protection. Economists therefore point to the possibility of continuing to enjoy attractive rates for another two years, despite a slight upward trend.
You can therefore still apply for a deferred-effect mortgage, to take advantage of attractive rate leverage in a few months' time. The possibility of locking in a fixed rate for 3 years makes perfect sense!

Should you prefer a variable rate?

Since 2013, people who have taken out a mortgage with a variable rate have generally benefited from lower interest rates than those who have bet on a fixed rate. Indeed, rates have reached record lows, enabling borrowers to obtain credit at lower costs.
Beyond the 2-year forecasts made by economists, it may now be risky to opt for a variable-rate mortgage. Fortunately, some banks offer flexible formulas that allow you to switch to a fixed-rate mortgage in the event of a significant rise. With a variable-rate mortgage, your contract also stipulates a threshold that your interest payments cannot exceed. Once again, it's a good idea to call in an advisor to study your file and give you an opinion on the upcoming market, so you can make the right investment. Don't hesitate to contact us if you'd like your opinion on the matter.
Valery Chantepy
Updated on: 31.01.2024Written by Valery ChantepyHead of mortgage department at Comparea
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