Splitting as a customer loyalty tool

Six years ago, a young couple took out two mortgage tranches with terms of six and ten years. The first tranche will expire next summer and the second will expire four years later. The couple’s bank made them an unattractive offer for the expiring tranche. Switching to another provider is not really an option, owing to the second tranche. This is because finding a provider willing to replace only one tranche is difficult – the latter would have to accept a subordination. Like many other mortgage holders, the couple has become dependent on their financing institution through having split their fixed-rate mortgage. Splitting, as this division into tranches is known, is therefore usually an instrument for ensuring customer loyalty and only in rare cases does it really make sense.

Adjust maturities

Fortunately, there are ways out. The simplest, but probably not the cheapest: the couple extends the expiring tranche with a two- to four-year fixed-rate mortgage or a Saron mortgage, so that after the second tranche expires, both tranches can be extended simultaneously with a new provider. Depending on the lender and its guidelines, it is also possible to take over and extend tranches with a maturity difference of up to two years.

Amortization of the expiring tranche

The couple can also pay off all or part of their expiring tranche. With a smaller mortgage, an unattractive interest rate hurts less. By the way, amortization is also one of the few reasons why splitting can make sense in the first place. For example, if the couple expects an inheritance advance after a few years, they can use it to pay off part of their mortgage and keep a second tranche in addition.

A switch is cheaper despite the penalty

Another option is for the couple to calculate the prepayment penalty they would pay if they cancel the second tranche next summer. For this there are special online calculators. The prepayment penalty can be offset against the interest saved by switching providers. If the loan-to-value ratio allows, it is worth checking whether the prepayment penalty can be financed via the new mortgage. Experience has shown that 0.4-0.8 percent of the interest costs can be saved by switching providers, because this is the average difference between the cheapest provider on the market and the average interest rate of all providers.

Our example shows that splitting the mortgage into several tranches is hardly worthwhile from an interest rate perspective. No mortgage provider on the Swiss market offers the most attractive conditions at all times and for every term. In addition, customer needs change over time and one provider usually does not cover all needs equally well. The likelihood that the offer of the couple’s bank for the tranche to be extended will have a lower interest rate or be at least as attractive as that of the cheapest provider on the market in each case is de facto equal to zero.