Consequences of possible negative interest rates in Switzerland

After a short break, the specter of negative interest rates is once again making the rounds in the Swiss financial center. In December, the Swiss National Bank (SNB) lowered the key interest rate unexpectedly for many observers, by 0.5 percentage points to 0.5 percent. Subsequently, the first Swiss franc bonds temporarily showed slightly negative returns again.

This was briefly the case, for example, with a Swiss Life bond, said financial experts from the fund provider Swiss Life Asset Managers at a presentation this week. “Switzerland could soon find itself in a negative interest rate environment again,” said Daniel Rempfler, head of portfolio management for government and emerging market bonds at the fund company.

According to the fund manager, the SNB has a choice between intervention in the foreign exchange market and interest rate cuts to counteract the appreciation of the franc. The SNB President Martin Schlegel has made it clear that interest is the main instrument, says Rempfler. He sees a significant risk that the SNB will lower the key interest rate below zero in the foreseeable future. Thomas Rühl, head of investment at Schwyzer Kantonalbank, assumes in a comment that key interest rates in Switzerland will continue to fall and could be below zero again by the end of the year. Given the expected interest rate cuts in the euro zone, the SNB had few alternatives, he writes.

According to Nils Thewes, Swiss head of bonds at the investment company DWS, the SNB is hesitant to lower the key interest rate into negative territory. “But if necessary, this card could be drawn again,” he says. Since the end of last year, the purchase yields on Swiss government bonds that are considered safe have been within sight of the zero line again. This is also linked to Switzerland’s reputation as a safe haven. “International investors are currently prepared to forego returns for safe Swiss franc investments,” says Thewes.

Money is considered safe in Switzerland – but what do the sharply fallen capital market interest rates mean for investments, mortgages, rents and real estate prices?

1. Festive mortgages

According to Dirk Renkert from the online comparison service Comparis, ten-year fixed-rate mortgages were recently offered at interest rates of around 1.1 to 1.7 percent. Interest rates on five-year fixed-rate mortgages were between 1 and 1.5 percent. Since the beginning of 2024, an average decline of 0.6 to 0.7 percentage points has been observed.

Historically, the current conditions for financing real estate are very attractive – this reflects the low interest rates in Switzerland. According to a barometer from Comparis, four out of five mortgage borrowers opted for long-term fixed-rate mortgages in the fourth quarter.

During the period of negative interest rates, the interest rates for fixed-rate mortgages were a bit lower, says Renkert. At that time, mortgage borrowers had the option of taking out ten-year fixed-rate mortgages at rates of less than 1 percent from some providers. But the interest rates for fixed-rate mortgages never fell into negative territory, even during the period of negative interest rates, he says.

The attractiveness of the current interest rate level is also demonstrated by the development in 2022. At that time, the benchmark interest rates for ten-year fixed-rate mortgages rose by around 2 percentage points within a few months until, according to Renkert, they reached a peak at around 3.3 percent in October 2022.

By opting for fixed-rate mortgages, many mortgage borrowers want to play it safe: This means they can lock in the low interest rates for several years and don’t have to worry about interest rate fluctuations.

2. Saron Mortgages

In contrast to fixed-rate mortgages, Saron mortgages adapt to the respective interest rate level and can fluctuate significantly. When interest rates rise, they become more expensive for mortgage borrowers – when they fall, they become cheaper.

Saron mortgages are therefore particularly attractive in times of ultra-low to negative interest rates. During the period of negative interest rates, Saron mortgage rates temporarily fell to 0.4 percent, says Renkert.

Most recently, the interest rates for these money market mortgages were between 1.1 and 1.6 percent, roughly the same as those for ten-year fixed-rate mortgages. According to Renkert, Saron mortgages were reduced by around 1.25 percentage points last year with the SNB’s key interest rate cuts.

3. Rent

The renewed fall in mortgage interest rates is also likely to have indirect consequences for tenants. The rents are based on the mortgage reference interest rate, which in turn is based on the average rate of domestic mortgages.

In December, the Federal Housing Office (BWO) left the reference interest rate at 1.75 percent until March. But it is now a foregone conclusion that it will then sink. A reference interest rate reduced by 0.25 percentage points would give tenants across Switzerland the right to have their rent reduced by up to 3 percent.

4. Savings and Pillar 3a accounts

Low interest rates make savings and interest products less appealing. “After deducting inflation, you are usually in the red with such investment products,” says Thomas Stucki, head of investment at the St. Galler Kantonalbank (SGKB). When you build up assets in Pillar 3a, you give away returns if you leave the money in interest-bearing accounts. Saving in securities in Pillar 3a is the better way to build up assets in the long term.

5. Real Estate and Stocks

It can be assumed that institutional investors will switch to stocks and real estate due to the low interest rates, says the SGKB investment director. Swiss real estate funds have been in demand again recently, but the premiums paid on the market for the funds are now quite high again. According to Rühl, real estate investments in particular are likely to benefit from the expected environment. In addition to lower interest rates, immigration and the lack of alternatives supported their prices.

Stucki believes Swiss stocks are attractive in the current environment. This is due not least to their defensive nature and the fact that they have recently lagged behind the US market and world stock indices. There is catch-up potential for many Swiss stocks.

The DWS representative Thewes is more reserved. Greed in the financial markets has grown significantly in recent years, he says. He advises investors to be a little more cautious in their return expectations in the coming years: “Risk awareness must come back to the fore.”