Not only are banks providing mortgages cheaper than ever – they are also carrying the cost of fixed interest rates for clients in the future. Behind this strategy is a bet that is dividing retail banking.

UBS retail bankers are even touting their wares on Twitter. «Fix your fixed-rate mortgage rate free of charge now. Up to a year ahead.» (see below) And they can be sure of retweets.

It really is a tempting offer. Because the interest rates for ten-year fixed-rate mortgages have fallen again. By shopping around, it is possible to obtain 1 per cent interest on a ten-year mortgage, price comparison website Comparis writes.

That is a new record low.

Act Now!

Mortgage holders are motivated to act now while the rates are so low. If their mortgage contract is not yet due to be renewed, they can at least secure the interest rate for next year. UBS promises to do that – for free.

The special offer comes at a cost to the number one in Swiss retail banking. Because to secure the interest rate, UBS has to conclude a forward transaction. This «forward» contract does not come free of charge, for a 10-year fixed-rate mortgage it currently «costs» 9 basis points, while a five-year mortgage costs 8 basis points.

That is effectively the «discount» that UBS is offering its potential clients for their next mortgage contract.

Banks Match Bets

Depending on volume, this could cost a pretty penny. Especially if interest rates were to rise soon. Along with many other local financial institutions, UBS has taken this into account – interest rate forwards are selling fast on the mortgage market. But why is that?

The truth is that numerous Swiss retail banks are currently betting quite differently to their clientele.

Stefan Muehlemann, partner of the Zurich financing specialist Pro Ressource Finanzierungsoptima confirms this. «The wide availability of free forward rates is an indication that the banks are expecting stronger negative interest rates,»  the independent mortgage expert told finews.ch.

But that isn’t the whole bet. Interestingly, the finance houses share the same desire as their clients to hold onto the present conditions in the future.

«Double Margin» for Banks

Because in contrast to what might have been anticipated, mortgages in a negative interest rate environment (article in German) have not been bad business for Swiss banking to date. The margins of the banks have increased significantly since the decision by the Swiss National Bank in January 2015.

«Despite a record low interest rate of 1 per cent for a 10-year fixed-rate mortgage the banks have still managed to extract a margin of 1.4 per cent against a market rate of -0.4 per cent,» Muehlemann explains. This represents a doubling of the margin in comparison to 18 months ago.

However, the current phase of good times despite negative interest rates could come to an end for the banks.

Weaker Refinancing Rate?

Muehlemann expects the margins to come under pressure.

«In particular the refinancing rate which has been indiscriminately brought in nationwide by the banks could be pulled into negative territory with a lower floor of 0 per cent,» he points out. This could for instance happen if clients demand even more favourable terms from the banks.

This shows that all participants in Swiss retail banking want to profit from the low interest rate environment. But every bet can have only one winner. Who that turns out to be, only time will tell.