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Old 13.03.2017, 19:39
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Benefits of a LiborFlex Hypothek and bank mark up

Hi there


We are currently trying to decide if to go for a Fixed or LiborFlex-Hypothek to finance our new home.


Traditionally I would have never thought to go for a variable interest mortgage, however, given the fact the interest as slightly lower, the interest (whether high or low) are deductible from a Tax point of view, we are kind of tempted to go for this type of mortgage.


I would like to hear the experience of anyone that has gone for this LiborFlex what was your rationale and whether it has been worth so far.


My second question is I have read in 2015 people were closing LiborFlex mortgages at 0.6% to 0.65%. We have been offered 0.8% in 2017, any other experience about having secured in Q4 2016 or early 2017 a lower rate than 0.8%?


Thanks for sharing your experience
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Old 13.03.2017, 19:55
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Re: Benefits of a LiborFlex Hypothek and bank mark up

This can be a good option for part of the mortgage if you have some flexibility with your finances and would like the option of paying off a chunk within relatively short time. Mostly, these are short term contracts (e.g. 1-3 years), with rate adjustments every 3, 6 or 12 months. At the end of the term you can choose to remortgage all, some or none. Because you are taking more risk (variable rate), the cost tends to be lower than a fixed rate. However, to cover that risk you need to be sure you could afford a sudden rise in rates. Given how low rates are currently, you should consider that they could double, triple, quadruple (hence, so does the interest you pay) quite easily and still be below historical rates. No-one can give you a definitive answer how likely that is, otherwise that would be built into the price.

Interesting you mentioned the tax aspect - of course, if you want to maximise the tax benefit, go for the most expensive rate you can find ...

I believe you can still get e.g. 5 year fix currently for around 1%, so consider whether the shorter term and slightly lower rate (with added risk) really suits you.

Also, don't forget the 'gotcha'...whatever term mortgage you get and however you split it, at the end of that term you either have to pay it off or remortgage at the prevailing rates at that time. For this reason I put 50% into a 10-year and the other 50% into a 3-year Libor, with the intention of only partially renewing or fully paying that at the end of 3 years, depending on rates/offers at the time.

The other 'gotcha' of course, is when you split terms like this, they really have 'gotcha'...you cannot shop around other providers for a renewal mortgage whilst you still have a longer term one with your existing lender. You will be forced to take whatever your current lender offers, or pay it off.
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Old 13.03.2017, 20:29
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Re: Benefits of a LiborFlex Hypothek and bank mark up

We have had a Libor flex since 2008. Are currently paying 1% - we are held by the contract terms to a fixed period, so cannot shop around to get the extra 0.2% reduction. From what I have heard 0.8% is close to the minimum available - there are other factors such as the size of the loan relative to value of the house that are relevant. I cannot see any disadvantages in going with a libor flex at the moment and there are only disadvantages in splitting the mortgage as one is commonly advised to.
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Old 14.03.2017, 09:36
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Re: Benefits of a LiborFlex Hypothek and bank mark up

1. The biggest factor is simply whether you think interest rates, on average over the period, will be better on the Fixed or the Flex. Or better suited to your income profile.

2. The Flex should be cheaper (on average), the difference is the (de)risk premium you pay for the Fixed.

3a. Is the premium for the Fixed worth it for you?

3b. Do you think either one is under-priced? Brave (/naive) move in a competetive market with so many almost identical offers, but many people seem to think they know better than 30+ banks.

Tax is mainly irrelevant to the decision - it is proportional to the interest regardless of the type of calculation.

The biggest factor may be other things, such as flexibility to pay off earlier (but why? given current interest rates, invest it instead and gain more and pay less tax).

We went for fixed, for the simple reason that we didn't have a strong understanding of costs here being new owners in Switzerland. We had no need for flexibility, and no desire for risk. With interest rates so low, the premium for fixed as a percentage of the cost was not as low as normal, but as an absolute amount was trivial.
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Old 14.03.2017, 11:30
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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This can be a good option for part of the mortgage if you have some flexibility with your finances and would like the option of paying off a chunk within relatively short time. Mostly, these are short term contracts (e.g. 1-3 years), with rate adjustments every 3, 6 or 12 months. At the end of the term you can choose to remortgage all, some or none. Because you are taking more risk (variable rate), the cost tends to be lower than a fixed rate. However, to cover that risk you need to be sure you could afford a sudden rise in rates. Given how low rates are currently, you should consider that they could double, triple, quadruple (hence, so does the interest you pay) quite easily and still be below historical rates. No-one can give you a definitive answer how likely that is, otherwise that would be built into the price.

Interesting you mentioned the tax aspect - of course, if you want to maximise the tax benefit, go for the most expensive rate you can find ...

I believe you can still get e.g. 5 year fix currently for around 1%, so consider whether the shorter term and slightly lower rate (with added risk) really suits you.

Also, don't forget the 'gotcha'...whatever term mortgage you get and however you split it, at the end of that term you either have to pay it off or remortgage at the prevailing rates at that time. For this reason I put 50% into a 10-year and the other 50% into a 3-year Libor, with the intention of only partially renewing or fully paying that at the end of 3 years, depending on rates/offers at the time.

The other 'gotcha' of course, is when you split terms like this, they really have 'gotcha'...you cannot shop around other providers for a renewal mortgage whilst you still have a longer term one with your existing lender. You will be forced to take whatever your current lender offers, or pay it off.
That is a valid point and something that I am also thinking about as I need to renew one of my mortgages this year. My rationelle for Libor is that if the bank is ready to commit for 10 years at 2xLibor (about 1.6% for 10 years) that means that even the bank does not think the rates will more than double in the next 10 years.

IMHO: it is important not to spend the savings of Libor over fixed, but to invest it.

Let's take a 1 million mortgage; a stock market ROI of 10%p.a and a marginal tax rate of 35%.:

- If the Libor stays low at 0.8%: you benefit 83K over 10 years.

- Say after 5 years the libor goes up 2x (to 1.6%): you are better off by 50k since you benefited from the lower libor for 5 years already.

- If after 5 years the libor goes up 3x to 2.4%, you would still be better off by 16K

- only if the libor goes up 4x after 5 years, then you would loose 13k over a 10 year fixed mortgage at 1.6%.


So the question is: is the potential gain of 83K over 10 years worth the risk? Only you can answer that.
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Old 14.03.2017, 11:44
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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That is a valid point and something that I am also thinking about as I need to renew one of my mortgages this year. My rationelle for Libor is that if the bank is ready to commit for 10 years at 2xLibor (about 1.6% for 10 years) that means that even the bank does not think the rates will more than double in the next 10 years.
I fully agree with you that the banks think rates will stay low but do they really care ?

For a fixed mortgage they borrow at a lower rate to lend to you, thier margin remains fixed at a certain percentage.

For a floating/LIBOR, the rate changes according to LIBOR at 3,6 or 12 months periods, their margin is fixed again, so if the ratew changes mortgage goes up.

Actually for the bank, i guess floating is more interesting as their margin is enhanced by the fact interest rates that THEY borrow at are negative, whilst they do not pass negative to the client. I currently have one at 0.8% and i know the bank borrows at -1% so they have a margin of 1.8% which is excellent for them !
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Old 14.03.2017, 12:39
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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I fully agree with you that the banks think rates will stay low but do they really care ?

For a fixed mortgage they borrow at a lower rate to lend to you, thier margin remains fixed at a certain percentage.

For a floating/LIBOR, the rate changes according to LIBOR at 3,6 or 12 months periods, their margin is fixed again, so if the ratew changes mortgage goes up.

Actually for the bank, i guess floating is more interesting as their margin is enhanced by the fact interest rates that THEY borrow at are negative, whilst they do not pass negative to the client. I currently have one at 0.8% and i know the bank borrows at -1% so they have a margin of 1.8% which is excellent for them !
i always wondered how the bank secured the fixed rate - because a clause in my fixed rate mortgage something about if they were unable to secure this, then they could cancel the mortgage or something to that effect. which kinda makes the fixed rate pointless if it just gets pushed back to you.

with a clause like that, maybe as a bank, i just borrow libor, take the risk and if it goes pear-shaped cancel the mortgage. maximize my earnings and screw the customer.
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Old 14.03.2017, 12:45
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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i always wondered how the bank secured the fixed rate - because a clause in my fixed rate mortgage something about if they were unable to secure this, then they could cancel the mortgage or something to that effect. which kinda makes the fixed rate pointless if it just gets pushed back to you.

with a clause like that, maybe as a bank, i just borrow libor, take the risk and if it goes pear-shaped cancel the mortgage. maximize my earnings and screw the customer.
I think that only counts right at the start in the offer, in case of a massive market change prior to finalising the agreement.

Once it is signed, the bank can get the fixed rate for the term agreed - and bear in mind they were actually expecting to get a much better rate themselves to make a profit, so it's very unlikely they can't get the rate at all.

Once confirmed, they can't come back later and say they didn't manage to fund it or their deal expired - that was their choice.
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Old 14.03.2017, 12:53
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Re: Benefits of a LiborFlex Hypothek and bank mark up

With Libor you can switch to a fixed rate mortgage at every renewal so if it starts creeping up you can lock into a fixed-term contract that protects you from further increases.
However, currently the 4-year fixed rate mortgage actually has lower interest than Libor (at homegate 3-month Libor is 0.84% and 4-year fixed is .79%). The interest rates are not likely to drop so Libor-linked mortgage looses its advantage of being able to profit from the reduction of interest but still allows the flexibility of lump-sum repayment without penalty if you need that.
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Old 14.03.2017, 13:04
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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With Libor you can switch to a fixed rate mortgage at every renewal so if it starts creeping up you can lock into a fixed-term contract that protects you from further increases.
However, currently the 4-year fixed rate mortgage actually has lower interest than Libor (at homegate 3-month Libor is 0.84% and 4-year fixed is .79%). The interest rates are not likely to drop so Libor-linked mortgage looses its advantage of being able to profit from the reduction of interest but still allows the flexibility of lump-sum repayment without penalty if you need that.
The first sentence is not necessarily true - Libor mortgages can also have a term and may not allow simple cashing in, or may have a fee to convert which could be quite significant.

And if the increases are expected, the fixed rate will be worse than it was, so you don't win overall.

If the fixed rate has lower interest than Libor, then the rates are likely to drop in the opinion of the banks - per my previous post, if you think differently then feel free to bet against them, personally I wouldn't.
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Old 15.03.2017, 13:21
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Re: Benefits of a LiborFlex Hypothek and bank mark up

Libor mortgages, especially uncapped ones, are not without their risk. If banks stop trusting each other, that rate could flash upwards. During the last financial crisis, the banks fiddled the rate down to give the impression that they were considered creditworthy. Due to the massive fines they got for this, they be reluctant to do so in future.

Libor mortgage customers may well, at some time in the future, receive a letter from their bank based on a template similar to the one below. It is transparently a spoof, but there might be some truth in it :

===============================================

Dear Client

You are receiving this letter because you currently have money market type mortgage with us which is based on a CHF LIBOR rate.

Over an extended period, these special products have given borrowers an extremely advantageous rate of interest, sometimes significantly below the target average rate of 5% which clients are told to plan long term for in order to account for any volatility in the financial markets, political and economic circumstances, and other factors influencing interest rate movements.

This bank has, in the past, offered these LIBOR Mortgage products to cater for the requirements of the more sophisticated clients who understood both the benefits and risks of these potentially highly volatile products, assessed their own risk appetite as high to very high, and wanted to supplement one of this bank's excellent standard fixed interest mortgage products with a small amount of exposure to the money market interest rates.
[Bank: or other similar formulation which pins the blame on the clients for exposing themselves to unnecessary risks, greed, and/or choosing an inappropriate product]

As you will probably be already aware, there has been some upward movement in the LIBOR rates recently, in some cases reaching rates of XX% [Bank: adjust as necessary] for short periods.

This bank has constantly warned of the potential risk of short to medium term LIBOR rate spikes, especially to those client who rejected the additional costs of purchasing a rate cap protection. [Bank: add an explicit reference here, if the bank had the foresight to issue in the past a vague, ambiguously worded document/letter etc. which could, somehow, be presented retrospectively as a warning to customers about LIBOR risks]

[Bank: Optional. Add another paragraph focussing on financial prudence, risk aversion, responsible financial houskeeping, careful budgetting etc. etc. and any other such sanctimonious claptrap designed to imply financial recklessness on the client's part.]

In view of the recent rate rises and to cater for the requirements of clients who want reduce or replace their existing LIBOR mortgages, and who no longer wish to wait to see how LIBOR rates develop in the short to medium term, the bank has created an attractive set of special alternative packages as follows:

[Bank: adjust the rates below as required.]
Fixed interest rate, fixed term:
1 year fixed interest mortgage 5.99%
2 year fixed interest mortgage 5.99%
5 year fixed interest mortgage 5.99%

Variable interest rate, fixed term:
During the fixed term, the bank reserves the right to correct the rate periodically, according to prevailing economic conditions and the financial markets.
1 year variable interest mortgage 4.99%
2 year variable interest mortgage 3.99%
5 year variable interest mortgage 1.99% [Bank: add some discrete, watered down hint that this is an 'introductory' rate.]

There will, of course, be a small fee for clients wishing to benefit from one of these new packages. [Bank: name your price!]

Clients who also have savings products with the bank, will continue to benefit from the attractive rates of interest on offer, typically 0.0001% - 0.0002% [Bank: alter as required] and no further enhancement of these rates is planned until the money markets have once against stabilised. [Bank: or similar formulation to disabuse savers of any wild idea that they'll get anything more anytime soon]


Yours sincerely,

Your client advisor.

===============================================
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Old 16.03.2017, 10:12
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Re: Benefits of a LiborFlex Hypothek and bank mark up

Your Kundenberater is nothing but a well paid salesman who goes by another name.

The bank doesn't really care, they'll use the sales pitch that serves them best. Until interest rates turned negative their predictions were just about always and across the board for increasing interest rates - nobody would take a fixed-interest mortgage if interest rates are expected to fall.

You folks probably want to check out mortgage broker moneypark.ch (as of this writing 10yr fixed from 1.1%, 3month LIBOR from 0.58%), perhaps compare with hypomat.ch by the Glarner Kantonalbank. Obviously they have their own agendas and super-low rates may come with strings attached, nonetheless you may well be in for a big nice surprise.
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Old 16.03.2017, 10:54
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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Libor mortgages, especially uncapped ones, are not without their risk. If banks stop trusting each other, that rate could flash upwards. During the last financial crisis, the banks fiddled the rate down to give the impression that they were considered creditworthy. Due to the massive fines they got for this, they be reluctant to do so in future.

Libor mortgage customers may well, at some time in the future, receive a letter from their bank based on a template similar to the one below. It is transparently a spoof, but there might be some truth in it :

===============================================

Dear Client

You are receiving this letter because you currently have money market type mortgage with us which is based on a CHF LIBOR rate.

Over an extended period, these special products have given borrowers an extremely advantageous rate of interest, sometimes significantly below the target average rate of 5% which clients are told to plan long term for in order to account for any volatility in the financial markets, political and economic circumstances, and other factors influencing interest rate movements.

This bank has, in the past, offered these LIBOR Mortgage products to cater for the requirements of the more sophisticated clients who understood both the benefits and risks of these potentially highly volatile products, assessed their own risk appetite as high to very high, and wanted to supplement one of this bank's excellent standard fixed interest mortgage products with a small amount of exposure to the money market interest rates.
[Bank: or other similar formulation which pins the blame on the clients for exposing themselves to unnecessary risks, greed, and/or choosing an inappropriate product]

As you will probably be already aware, there has been some upward movement in the LIBOR rates recently, in some cases reaching rates of XX% [Bank: adjust as necessary] for short periods.

This bank has constantly warned of the potential risk of short to medium term LIBOR rate spikes, especially to those client who rejected the additional costs of purchasing a rate cap protection. [Bank: add an explicit reference here, if the bank had the foresight to issue in the past a vague, ambiguously worded document/letter etc. which could, somehow, be presented retrospectively as a warning to customers about LIBOR risks]

[Bank: Optional. Add another paragraph focussing on financial prudence, risk aversion, responsible financial houskeeping, careful budgetting etc. etc. and any other such sanctimonious claptrap designed to imply financial recklessness on the client's part.]

In view of the recent rate rises and to cater for the requirements of clients who want reduce or replace their existing LIBOR mortgages, and who no longer wish to wait to see how LIBOR rates develop in the short to medium term, the bank has created an attractive set of special alternative packages as follows:

[Bank: adjust the rates below as required.]
Fixed interest rate, fixed term:
1 year fixed interest mortgage 5.99%
2 year fixed interest mortgage 5.99%
5 year fixed interest mortgage 5.99%

Variable interest rate, fixed term:
During the fixed term, the bank reserves the right to correct the rate periodically, according to prevailing economic conditions and the financial markets.
1 year variable interest mortgage 4.99%
2 year variable interest mortgage 3.99%
5 year variable interest mortgage 1.99% [Bank: add some discrete, watered down hint that this is an 'introductory' rate.]

There will, of course, be a small fee for clients wishing to benefit from one of these new packages. [Bank: name your price!]

Clients who also have savings products with the bank, will continue to benefit from the attractive rates of interest on offer, typically 0.0001% - 0.0002% [Bank: alter as required] and no further enhancement of these rates is planned until the money markets have once against stabilised. [Bank: or similar formulation to disabuse savers of any wild idea that they'll get anything more anytime soon]


Yours sincerely,

Your client advisor.

===============================================
Dear Bank person,

Please debit my account with Chf xxx'xxx to cover the outstanding mortgage, then go screw yourself

Yours
Today Only
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Old 16.03.2017, 12:01
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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Your Kundenberater is nothing but a well paid salesman who goes by another name.

The bank doesn't really care, they'll use the sales pitch that serves them best. Until interest rates turned negative their predictions were just about always and across the board for increasing interest rates - nobody would take a fixed-interest mortgage if interest rates are expected to fall.

You folks probably want to check out mortgage broker moneypark.ch (as of this writing 10yr fixed from 1.1%, 3month LIBOR from 0.58%), perhaps compare with hypomat.ch by the Glarner Kantonalbank. Obviously they have their own agendas and super-low rates may come with strings attached, nonetheless you may well be in for a big nice surprise.

1.1 for 10 years is really good. One woudl ned to check the exact terms of course. However, I am not sure how can I switch only one part of my mortgage to a different part.
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Old 20.03.2017, 23:27
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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1.1 for 10 years is really good. One woudl ned to check the exact terms of course. However, I am not sure how can I switch only one part of my mortgage to a different part.
With a new building there's probably the 1st mortgage for up to 65% and the 2nd mortgage for another 15%. For an older building there may be more deeds outstanding. At least in theory you can get credit for each deed from a different lender.

If you want to switch before the contract term has run out it'll probably cost you.
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Old 20.03.2017, 23:43
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Re: Benefits of a LiborFlex Hypothek and bank mark up

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With a new building there's probably the 1st mortgage for up to 65% and the 2nd mortgage for another 15%. For an older building there may be more deeds outstanding. At least in theory you can get credit for each deed from a different lender.
This seems to be a thing of the past and what matters today is whether you're buying the property as your primary residence or not - for the primary residence with 20% down these days the 1st mortgage is 80% and that's it (or even 83% as was my case). Secondary residences require at least 30% down and then the rest is also usually paid out as one mortgage rather than 65%+5%.

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If you want to switch before the contract term has run out it'll probably cost you.
Not probably but certainly - the penalty for early termination is all the remaining interest to the end of the term. In some cases (if you've only got a year or two left on a pre-2009 contract) it may be worth paying the penalty in order to secure a much lower rate that is available today.
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