What are the disadvantages of dividing (tranching) a mortgage?

The 3-point risk matrix

Tranching a mortgage has three major disadvantages: extreme dependence on the house bank (lock-in effect), as individual terms make it impossible to switch, a significantly weakened negotiating position for follow-up financing and additional administrative costs due to multiple debt note changes. When a single tranche expires, you are in fact defenceless at the mercy of your current provider's terms and conditions.

The golden cage of banking captivity

The most serious disadvantage of carving is the so-called lock-in effect, also known as “bank imprisonment” in Swiss experts. If you divide your entire mortgage into two or three fixed-rate mortgages with staggered terms — for example, a five-year tranche and another 10-year tranche — you are chained to your current financial institution. If the first tranche expires after five years, you generally cannot switch to another bank with this partial amount.

Hardly any Swiss financial institution is prepared to take on a second-tier mortgage while the first-rate tranche is still held by a competitor. The risk in an emergency is too confusing for institutions and the administrative effort is disproportionate to the return. In concrete terms, this means that when the first tranche expires, you must renew it with your previous house bank. They have no opportunity to explore the market, compare offers or completely change institutions. You are in fact at the mercy of your bank's offer, which often completely neutralizes the theoretical advantages of interest splitting.

Loss of negotiating power in case of follow-up financing

This dependency directly results in a noticeable loss of negotiating power. Free competition among banks and insurance companies usually ensures that borrowers can claim attractive conditions. However, if you are sitting at the negotiating table as a “captive” customer, the institute knows exactly that you have no realistic alternative option. You can't threaten with a cheaper offer from an online platform because the competition won't even be able to accept you as a customer with a single partial term.

The result is a gradual worsening of conditions. In such situations, banks tend to be less accommodating in setting interest rates when renewing expiring tranches. The so-called “shop window interest rates”, which attract new customers, remain out of reach for you. Over the years, these interest premiums often added up to considerable amounts. What you wanted to save on interest rate risk through graduation may be lost twice as a result of poorer margins during the extension.

Administrative complexity and hidden fees

In addition to the strategic disadvantages, carving also entails tangible bureaucratic hurdles. In Switzerland, a mortgage is always linked to bond securities that are entered as pledges in the land register. If a mortgage is broken down into several parts, these bonds must also be split or rebuilt in the worst case scenario. Each adjustment entails notary and land registry fees, which are very significant depending on the canton.

In addition, support costs for the entire portfolio are increasing. Instead of a single contract flow, it is now necessary to monitor several credit agreements, keep an eye on deadlines and coordinate termination dates. For example, if you forget to negotiate an expiring tranche in good time, many banks will automatically convert it into an expensive variable mortgage. Managing one's own living space thus mutates into a permanent bureaucratic task.

Blocked flexibility when selling or making life changes

Life rarely runs in a straight line, and this is exactly where another major risk of tiered mortgages lies. What happens if your circumstances change unexpectedly? A work-related move, a divorce or simply the desire to sell the property early can bring down the laboriously constructed tranche architecture. If you have to sell a house that still has fixed-rate mortgages with widely differing terms, you are faced with a problem.

The buyer of the property is in no way obliged to take over your existing mortgages — they often don't even want to because of their own plans. If you have to cancel your mortgages early, Swiss banks charge a so-called early repayment penalty. Since you almost always have at least one tranche with a long remaining term in your portfolio when carving, this early exit will be extremely expensive. In such cases, the fines to the bank can quickly reach five-digit amounts and eat up a significant portion of the potential sales profit.

Conclusion: Clever structuring beats blind division

Carving out a mortgage is not a panacea, but a sharp tool that must be handled with care. In Swiss practice, the alleged security of risk diversification is all too often undermined by the harsh reality of banking captivity and loss of negotiating power. Anyone who mixes terms thoughtlessly builds up a financial corset, which can be extremely expensive in the event of unforeseen life events.

In summary, it can be stated that splitting up the mortgage only makes sense if you are fully aware of your long-term commitment to the chosen institution. A clever alternative could be to opt for a single product with a high degree of flexibility — such as a SARON mortgage with a short framework period — or at least to select the tranches so that they are a maximum of one to two years apart in order to keep a real changeover window open. Always retain the freedom to react to changes in life and the market.

Structuring analysis glossary

• Bank imprisonment (lock-in effect): The structural impossibility of changing financial institutions in the case of a tranched mortgage because the individual tranches expire at different times and third-party banks do not accept second-tier partial financing.
• Debtor Splitting: The legal division of a pledge in the land register in order to secure several separate loan tranches. This process triggers cantonal notary and land registry fees in Switzerland.
• Early repayment penalty: A contractually agreed compensation payment to the bank if a fixed-rate mortgage is terminated before the regular term expires. The amount depends largely on remaining maturities and the current interest rate level.