Swap Rate

The term “swap” means “exchange”. In finance, an Interest Rate Swap (IRS) is a contract between two parties to exchange interest payments over a specified period (for example, 10 years).

In simple terms for the mortgage market:

• It is the cost at which a bank borrows on the capital markets so it can guarantee you a fixed rate over a long period (5, 10, or 15 years).
• It reflects market participants’ expectations about how benchmark interest rates (such as SARON) will change over the swap period. The more they expect rates to rise, the higher the swap rate.

• Swap Rate: This is the cost of the raw material (money) for the bank. This rate is public and varies daily according to the market.
• Bank Margin: This is the premium charged by the financial institution to cover its operating costs and client risk, and to generate profit (generally between 0.6% and 1%). This margin is negotiable.

Concrete Example: For a 10-year mortgage, the bank uses the 10-year CHF Swap Rate. If this swap rate is 0.59% and the bank applies a margin of 0.75%, the final mortgage rate will be 1.34%.