The forward loan is an annuity loan that plays a role in real estate financing. It will only be paid out after a certain lead time after the conclusion of the contract. In this so-called forward period, ie in the period between the conclusion of the contract and the start of the term, no loan or commitment interest is due.
A forward loan is usually concluded when a certain interest rate is to be secured for the future at the time the contract is concluded. That is why forward loans are usually also used in follow-up financing.
In order to guarantee interest rate security, the borrower must pay an interest premium, which is calculated based on the duration of the interest rate fixation and is also dependent on the duration of the forward period and the current interest structure.
When is it worth taking out a forward loan?
Basically, it can be said that a forward loan is not worthwhile when there is a period of high-interest rates. This is the case even if all the signs look as if interest rates for real estate financing would decrease in the following years.
However, if there is a low-interest rate phase, a forward loan is a wise decision. This will secure the currently low-interest rate for follow-up financing.
Put simply, a forward loan is a bet. At low-interest rates in the future.
Use of low-interest rates for forward loans
A forward loan is used to conclude real estate financing for the future with the current conditions. For this reason, it is worthwhile to use the economically favorable location and the low-interest rates for financing. However, when interest rates for mortgage lending have bottomed out, there is usually a hint of a turnaround.
Interest rates will not continue to fall, rather there will often be a trend of rising interest rates. Of course, interest rate developments can never be predicted, but low-interest rates are always a good argument to take out a forward loan. This reduces the risk of rising interest rates for real estate financing.
Early completion is worthwhile
A forward loan can be taken out up to 60 months in advance. If the current debit interest rate commitment for real estate financing ends within the next five years, a forward loan can be a cheap follow-up financing.
Anyone who chooses a forward loan must – as already mentioned at the beginning – pay an interest premium for the forward period. This is about 0.01 to 0.02 percent per month. If it is to be assessed whether the conclusion of a forward loan is worthwhile at the current time, this interest premium must be included in the costs.
If the interest for the construction money increases during the time of the forward period beyond the interest premium, then it pays off to have taken out a forward loan. With shorter forward periods of up to twelve months, some banks are now also waiving the interest mark-up. There are always certain offers that do not include a surcharge. For this reason, an in-depth comparison is of course always useful.
Benefit from the forward loan after canceling a long interest rate fixation
In addition to follow-up financing, a forward loan is also suitable for rescheduling. Borrowers in particular, who once agreed a long fixed interest rate with their real estate financing, can exercise their statutory right of termination after ten years.
According to Section 489 of the German Civil Code, it is, therefore, possible, ten years after the full payment, to cancel all or part of the current real estate financing. In this case, you do not have to pay a prepayment decision. A look at the contract documents and a comparison of cheap forward loans can help you find suitable follow-up financing and save money.
The advantages of a forward loan also have limits
Although there is little reason not to take out a forward loan during a low-interest rate phase, it is not so easy to cancel a contract. If the loan was concluded at a rather unfavorable time and borrowers want to terminate the contract prematurely, banks usually charge a so-called non-acceptance fee. This usually corresponds to the loss of interest earned by the bank. It therefore only makes sense to not use a forward loan if there is another alternative that also compensates for the compensation payment.
Calculation of a forward loan
Two factors are decisive for the calculation of a forward loan: the remaining term of the current real estate financing and the duration of the interest rate commitment of the forward loan. The interest premium for the forward period is calculated from these two variables. The longer the current loan contract runs and the longer the selected fixed interest rate for the forward loan, the higher the interest premium will be.
However, other factors are important for the concrete calculation of a forward loan. The duration of the fixed interest on the follow-up financing, the loan amount chosen and the desired repayment also play a role. Since the calculation is very individual and always depends on the individual needs of the borrower, this should be done by a bank or an independent credit intermediary.
Weigh the pros and cons of a forward loan
Whether the decision for a forward loan is good or bad depends, among other things, on the borrower’s life situation, their own expectations of interest rates and their interest in financial issues in general.
Borrowers who rely on stability can of course secure long-term interest rates with a forward loan. In the event of changes in life (eg change of residence, change of employment, own use of the property), a forward loan can also become a financial burden.
If the questions about the current and planned life situation are answered, a forward loan can certainly contribute to more security in the personal planning of finances. For example, the monthly rate has been fixed for a long time and a sudden rise in interest rates does not have a negative impact on monthly expenditure on financing.
In view of these facts in particular, the premium for the forward loan helps to hedge against rising interest rates. It is a kind of insurance premium. Such protection often proves to be sensible and necessary if borrowers have only a small amount of equity. In addition, of course, very few customers want to monitor the development of interest rates over several years in order to find an optimal time for follow-up financing. In this case too, it is worthwhile to secure today’s low interest rates for later with a forward loan without regularly keeping an eye on the development of the interest rate level.
Obtain offers for forward loans in good time
Many savings banks, banks now offer forward loans, but only a comparison of different offers leads to the best loan for the individual situation.
Borrowers should obtain their first offers at the latest when the current fixed interest rate on real estate financing is less than 36 months. At best, the desired loan amount and a previously selected fixed interest period should then be used to search for corresponding offers. Independent credit intermediaries can be of assistance here.
Borrowers who are not yet sure whether a forward loan is actually a good solution for them can still obtain offers about twelve months before the end of the fixed interest period and usually still benefit from the fact that due to the short forward Period no interest premium is calculated.