How is it Calculated?
The SARON, or Swiss Average Rate Overnight, is set daily, as its name suggests, after the close of the Swiss stock exchange at 6 p.m. It is calculated using a complex formula that takes into account the volume of transactions recorded that day. It gradually replaced LIBOR from 2021, following an initiative by the UK Financial Conduct Authority (FCA), as LIBOR relied more heavily on expert estimates. Because it fluctuates and is determined daily, SARON has the advantage of reflecting both market downturns and upturns.
A Daily Rate.
The logic behind SARON is, in a way, to compensate for uncertainty. Whereas a fixed rate typically sits one to one-and-a-half percentage points above the SNB’s base rate, SARON remains much closer to it. To simplify interest calculations for borrowers choosing this type of loan, the rate is locked for three months, effectively giving you a short-term fixed rate. Its daily level is still easy to monitor via your bank’s e-banking app, and it is also published online and in the financial press.
A Fluctuating Rate that Requires Careful Timing.
When rates are trending downwards, as we are currently seeing, this option can allow you to wait for the right moment to fix your rate again. It is important to note that even if interest rates were to turn negative, SARON will never fall below its floor of 0%. During a period of rising rates, however, you must be prepared to absorb a sudden increase in borrowing costs. Fortunately, its cancellation terms are fairly flexible, allowing you to exit a SARON agreement within three to six months. If you are in the process of purchasing a property or renewing your mortgage, do not overlook this option and speak to a real estate financing expert.
