Interest rates showing signs of life

rentingflat

We have translated our latest blog entry for the growing number of our international readers.

We believe this article is of special interest for expats and foreigners living in Switzerland:

Interest rates were moving significantly during the last months, which we think is interesting to have a closer look at. Last November we were writing on this blog about the current low interest rate environment and the different implications this has. While savers, insurers and pension funds are suffering and have to cut their yield expectations, the low interest rates have positive impacts on debtors (i.e. the government) and those who live in a rented home. For the latter, last weeks had especially good news. The so called „Referenzzinssatz“ which is the base interest rate for rentals has been lowered to 2% (from 2.25%), even while market interest rates were moving upward during the last half year. The 10-year Swiss Government bond yield climbed to 1.2% in the last weeks (coming from 0.5% in November 2012, more than doubling!). What to expect from these recent occurrences?

Anyone who lives in rented accommodation should send a letter to the landlord asking for a rent reduction because of the lower „Referenzzinssatz“. As an example, who has not asked for rent reductions since the rate was still at 2.5% (March 2012) can now expect a 5.6% reduction to his monthly rental bill.

But how is it possible that the „Referenzzinssatz“ has been lowered while market interest rates were moving up? The „Referenzzinssatz“ is calculated as an average of all new and renewed mortgages in Switzerland. Renewed mortgages now generally bear a lower interest than some years ago when the previous mortgage was done. Therefore the „Referenzzinsatz“ lags behind the actual market rates. When market rates are moving lower, the „Referenzzinssatz“ is lowered more slowly. When market rates are shooting upwards, it also takes a while until the “Referenzzinssatz” reacts. Therefore it is understandable how the apparently paradoxical lowering of the “Referenzzinssatz” was possible.

Another part of the rent is the general inflation. Landlords are allowed to pass on part of the general inflation (max. 40%) to the tenant. However, we see only very modest leeway for that because inflation in Switzerland was very low for quite some time. Taking the same example from above when the rent was last time adjusted in March 2012, the effect from the inflation would even be negative by -0.15% (according to a publicly available table from the “Mieterverband”). If in the meantime, the operating and maintenance costs have increased, this may also be passed on by the landlord. However, such increases must be backed by evidences (i.e. bills) to be valid. So at this moment, nothing should be in the way of a rental reduction.

Conclusion

Within a short time the market interest rates have risen. For tenants this has not yet transformed into higher rental costs. In contrary, the “Referenzzinssatz” lags behind the market rates and was lowered again to now only 2%. Tenants are well advised to ask for a rent reduction, especially as the general inflation was very low or even negative. Aeppli & Mueller Consulting GmbH supports you in case you wish to act on this news.

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