With a forward loan, you can benefit from the currently low interest rates for the follow-on financing of your construction loan. A forward loan is interesting for anyone whose fixed interest rate mortgage expires over the next few years. In this case, it is best to think about their follow-up financing at an early stage and weigh up whether they should not already tie their remaining debts to the current low interest rates.
What is a forward loan for follow-up financing?
The forward loan works in principle quite simply. If the fixed interest on your construction loan expires, your bank will suggest follow-up financing options so you can plan the repayment of your remaining debt. With the expiry of the interest rate, you then have the choice to continue the loan with your bank or replace it. An effective means for this is a forward loan.
Basically, a forward loan works so that before the interest rate period expires, you can take out a new loan from another bank, which you use to repay the remaining debt at your bank. Of course, the new loan is usually paid back to your new bank in installments. The point is that you agree on a new fixed interest rate at the conclusion of follow-up financing, at the current conditions.
If the interest rate lock on your mortgage loan expires in 24 months and you are already opting for a forward loan as follow-up financing, you are guaranteed to pay only the current interest rate, regardless of whether it has risen or fallen in 24 months. You get planning security and are independent of possible interest rate fluctuations in the future.
Until the end of the fixed interest period, you will continue to pay your repayment installments as normal. On the day the mortgage expires, the new bank pays the remaining debt to your previous bank. The mortgage is transferred to this bank and you pay the remaining debt back at the agreed rates at the current low interest rate.
Advantages and Disadvantages of Forward Loans
Probably the biggest advantage of follow-up financing via forward loans is the good planning. Especially in times of financial crisis and the sometimes unpredictable interest rate development, you can already set today how high the interest rate on your follow-up financing will be in several months or years. Currently, interest rates are lower than they have ever been. If the current decline in interest rates reverses to the opposite in one year, there is a risk that the repayment of your remaining debt due to high interest rates will be really expensive.
On the other hand, the conclusion of a forward loan is basically nothing more than a bet on rising interest rates. The agreed interest rate applies in any case. So if it happens that interest rates go down even more after the loan is over, you still pay the agreed interest rate, which makes your follow-up financing more expensive than it should.
Experts currently see no acute indications that interest rates will soon rise again. However, it is also clear that they can hardly sink further. For you, this means that you do not have much to lose, because interest rates can hardly fall much lower. On the other hand, if they rise again in some time, you will profit from the low interest rates in the future and save a lot of money as a result.
Forward Loan: Information about costs and decision time
The question remains to clarify when exactly you should make a decision for or against a forward loan for follow-up financing. The basic rule is that a forward loan is available to anyone whose fixed interest arrears expires in 12 to 66 months. With a shorter period than 12 months, a forward loan is barely worth it, if it is offered at all. For more than 66 months, no bank should commit itself to the current interest rates.
As far as the timing of the decision is concerned, it is up to you whether to opt for a forward loan now, or to speculate that interest rates will continue to fall over the coming months. Before concluding a forward loan, you should absolutely compare various offers and pay particular attention to the interest premiums.
What are interest premiums?
Banks are taking some risk with fixed interest rates for the future. To do this, they usually charge an interest premium of 0.01 to 0.03 percentage points per month, which elapses between the conclusion of the forward loan and the expiry of the interest rate commitment on the current loan.
Forward loan example: You sign today the contract of your Forward Loan. It will take 24 months for the loan to end its loan and the new bank to pay the loan. With an interest premium of 0.02 percentage points, the interest rate of your forward loan increases by 0.48 percentage points. For example, if the current interest rate is 3.10 percent, the interest rate on your forward loan is 3.58 percent (3.10 percent interest rate + 0.48 percent interest premium).
Due to the fact that banks are currently getting long-term loans at much better terms than short-term loans, many of them are currently refraining from applying interest rate surcharges. Should you still hesitate and find that interest rate surcharges are on the rise, you are well advised to complete the forward loan as soon as possible, as high or rising interest rate surcharges are a clear indicator that banks are expecting interest rates to rise again.
Additional costs hardly arise with follow-up financing via forward loans. The annual percentage rate of interest is set at the time the contract is concluded. In this all costs are included, which are incurred by the loan. The only additional cost is the debt restructuring, because since the mortgage is transferred from one bank to another, the land registry must be active and also a notary involved.
These costs are incurred only once. How high these costs are depends on the individual case. As an order of magnitude, however, you can expect something more or less than 0.17 percent of the remaining debt. For example, if your remaining debt amounts to 150,000 euros, you can expect a one-time extra for the debt restructuring of approximately 255 euros.
Conclusion on follow-up financing by means of forward loans
A forward loan is currently a very interesting option if you want to continue to benefit from the current low interest rates in the future. While you are making a bet that you can win or lose, the risk of loss is pretty low right now. In times of turbulent financial markets and unpredictable changes in interest rates, you should weigh up whether to speculate on even lower interest rates or, in the long run, at least in terms of follow-up financing, decouple from the risks of rising interest rates.
Our topics on this page
- 1 What is a forward loan for follow-up financing?
- 2 Advantages and Disadvantages of Forward Loans
- 3 Forward Loans: Information on costs and decision time
- 4 What are interest premiums?
- 5 Conclusion on follow-up financing via forward loans