Swiss mortgage reference rate hits 1.75%, anticipating spring surge

Two cities in Switzerland were ranked at the top-ten most expensive cities in the world, now rents are set to increase. © Keystone / Christian Beutler

The reference interest rate used as a guide for residential rents has risen for the second time this year. The Federal Housing Office (BWO) is increasing the mortgage reference interest rate from 1.50% to 1.75%, according to a statement on Friday. Many rents are likely to rise again.

In determining the mortgage reference rate, the BWO relies on the quarterly average interest rate for domestic mortgage loans from Swiss banks. According to the BWO, this has risen from 1.59% in the previous quarter to 1.69%. This means that it is now back above the threshold for the next interest rate hike.

The main reason for the rise in rents is the mechanism of the mortgage reference interest rate. Because mortgage rates have fallen from their historic lows in the course of the interest rate turnaround, the reference interest rate has now also risen. And because this is rounded up or down to the nearest quarter of a per cent in the calculation, it has now risen to 1.75%.

+Golden cages and rising rates: headaches for the Swiss rental market

At the beginning of June this year, the reference interest rate rose for the first time in its history. This resulted in higher rents as of autumn this year. And now the next rent shock is already imminent. Specifically, the next round of rent increases can be expected in spring 2024 after the reference interest rate increase that has now been decided.

This is because if the reference interest rate is increased by 0.25 percentage points, landlords will be allowed to raise rents by 3.0% – provided they have passed on the previous reductions. Specifically, there is a right to an increase if the current rent is based on the previous reference interest rate of 1.5%, which has been in force since 2 June 2023. If it is still based on the previous rate of 1.25%, there is an even greater entitlement to an increase.

+‘Myth’ of spiking Swiss rents comes under scrutiny

As a reminder, the rate was 3.5% when it was introduced in 2008, after which it gradually fell. According to an estimate by the canton bank of Zurich, around 60% of all tenancies are currently based on the current reference interest rate. The proportion of those affected has therefore risen by around 10 percentage points since the last increase.

However, analysts surveyed by the financial news agency AWP agree that this is likely to be the last increase in the reference interest rate in the medium term. They do not expect any further rent increases in 2024 at least.

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