Four times a year the rate of interest used to set the rents in Switzerland is reviewed. If the aggregate average mortgage rate goes down some renters can request lower rent. If it goes up some landlords can raise rents. This time the rate remained at 1.25%, however it was close to moving to 1.5%.
The interest rate used to set the rent reference rate was the average rate on Swiss mortgage loans outstanding at 31 December 2022. The average rate this time was 1.33%, up from 1.18% in the third quarter of 2022. This rate is then rounded to the closest 0.25%. If the average interest rate had been 1.375% the reference rate would have risen to 1.5% and triggered higher rents.
Since its introduction in 2008 the rent reference rate has never risen. Instead it has consistently fallen from 3.5% to 1.25%.
However, a rise is almost inevitable. Changes in the underlying interest rate are delayed. The interest rate is calculated by averaging all existing mortgages of all durations. This slows down the pace of adjustment because 10-year mortgages set when rates were low will remain in the calculation for 10 years. It takes time for new more expensive mortgages to dilute the effects of past long-term mortgages with low rates.
As old low cost mortgages roll out of the equation and new mortgages with higher rates are added the rate will rise. The average mortgage rate jumped by 0.15 percentage points (1.33% – 1.18%) over the last quarter. If it does this again over the next quarter then it will reach 1.48% and push the rent reference rate to 1.5%.