John Charcol has launched the Swiss Mortgage, the first ever sterling mortgage based on Swiss Franc interest rates. This innovative product is based on short-term (3 month Swiss Franc Libor) interest rates but it is a Sterling mortgage and therefore has absolutely no currency risk to the borrower. The initial pay rate is just 3.99%, well below equivalent conventional tracker mortgages based on UK interest rates.
The Swiss Mortgage will track the Swiss Franc 3 month Libor rate for 5 years (to 31/12/10) with a margin of +3.23% and is available for loans up to 80% loan-to-value up to £1m, although larger loans will be considered. The arrangement fee is 0.5% of the amount borrowed and the minimum loan is £50,000.
Ray Boulger, senior technical manager at John Charcol, comments: “This is a brand new mortgage which is based on the same concept as our renowned Federal Reserve mortgage, which tracks the US Libor rate. Historically, at least in living memory, Swiss short-term interest rates have always been much lower than UK rates. Indeed, Swiss Franc 3 month Libor has been under 1% for the last four years and the highest it has been in the last ten years is 3.59%. As a comparison, UK 3-month Libor has been between 3.39% and 5.01% during the last 4 years and the highest it has been in the last ten years is 7.87%.
“It is important to understand the difference in the risk and reward with a sterling mortgage linked to a non sterling tracker rate, compared to an ordinary tracker mortgage linked to UK interest rates. Obviously, as with any variable rate mortgage, there is interest rate risk but the main attraction of this mortgage is the lower interest rate compared to an ordinary tracker mortgage. The key to evaluating this product is the likely differential between short-term Swiss and UK interest rates over the next five years, i.e. the average difference between sterling and Swiss Franc interest rates over this period. In this respect it is this gap which is important, not the actual interest rates. Provided the gap between Swiss Franc and sterling rates over the 5 years doesn’t, on average, narrow by more than about 0.75%, this mortgage will deliver excellent value, in addition to having the benefit of a low initial rate.
“Furthermore, because Swiss Franc interest rates have tended to be much more stable than sterling rates there is a good possibility that interest payments on this mortgage will be much more stable than a mortgage linked to UK rates, which may be an added attraction to some borrowers. And, of course, there is absolutely no currency risk.”
An early repayment charge (ERC) applies only during the 5 year term of the deal but borrowers have the option to repay up to 10% of the loan each year ERC free. Some may wish to take advantage of the low rate to make overpayments, thus repaying their mortgage quicker and saving on interest costs. The current exit fee is a well below average £95.
