When the fixed interest rate on a real estate loan is nearing the end, it is time for the borrower to seek follow-up financing to pay off the remaining debt on the loan. One possibility is to secure a forward loan early on – and thus possibly cheap interest. But where there is planning certainty on the one hand, there is also a risk of speculation on the development of interest rates.
When is a forward loan granted?
There are very special requirements for taking out a forward loan. In principle, such a loan can only be used for debt rescheduling and mortgage lending purposes if it is secured by entry in the land register is available – which the bank usually requires when taking out a real estate loan. There is often a minimum loan amount for a forward loan; this means that this special follow-up financing is refused if the remaining debt is too low.
It is common to conclude the forward loan with a remaining term of between one and three years, but theoretically it is also possible to have a lead time of up to five years. If the fixed interest rate on the existing real estate loan ends in more than 60 months, a forward loan is denied.
What exactly is a forward loan?
A forward loan is a follow-up financing that reaches for the fixed interest rate on the real estate loan. The special thing about such a loan: the borrower can decide on follow-up financing for months or even years before the interest rate fixation expires, instead of having to decide within a few weeks, as with other common follow-up financing. Due to the interest rate already agreed at this point in time, the borrower is guaranteed planning security and a solid calculative basis for the future – which of course makes sense especially in times of a comparatively low interest rate.
This speaks for a forward loan:
A big plus of the forward loan is the interest-free lead time. In principle, forward loans are loans with constant rates, ie annuity loans, but the payment is made to the borrower at a later and agreed date. Typically, the lending bank would now charge commitment interest about six months after the loan was approved. In the case of a forward loan, the commitment interest does not apply because the fixed interest rate does not actually start until a later point in time.
The planning security of the financing has already been mentioned: Borrowers know exactly what costs they can expect and can therefore calculate more precisely – in the worst case, however, they pay more than they would have paid for a short-term follow-up financing .
This speaks against a forward loan:
This is planning certainty for guaranteed interest rates, which, depending on the development of the financial market, may be above the interest level that will prevail in one to five years if follow-up financing is to take effect one – the other is the forward surcharge requested by the bank. The amount of the surcharge is based on two factors: on the one hand, the expected interest rate development, and on the other hand, the duration until the loan is actually paid out. The following applies: the further the credit call is in the future, the more expensive the loan will be. Likewise: if rising interest rates are expected, in the short or medium term, the premium is higher than in the case of expected declining or at least stagnating interest rates.
Attention: a forward loan is not to be seen as a non-binding option! The borrower concludes a valid and binding contract with the bank, so when the fixed interest period ends, it cannot simply be terminated due to cheaper current interest rates. As with any other mortgage loan, however, there is the option of agreeing a so-called exit clause – but most banks can pay it princely.
What is advisable to borrowers?
Whether a conventional loan or a forward loan is more worthwhile as follow-up financing for construction finance can actually only be answered when the time at which the fixed interest rate comes to an end. Only then will the current borrowing rate be known on the market and can it be compared with the proposed interest rate on the forward loan (including a surcharge) – only then will it be too late.
Elementary is the point at which the lending bank would charge commitment interest for a normal follow-up loan. As a rule of thumb, if the bank does not request any interest for at least six months, then a follow-up loan is more worthwhile than a forward loan. If the end of the fixed interest period is more than six months in the future, the forward loan may be cheaper.
Borrowers have no choice but to calculate and compare. By the way: if a prolongation, ie no change of bank, the creditworthiness of the borrower does not have to be checked again, but differently if there is a change of bank, ie a debt rescheduling: the creditworthiness of the borrower and especially the value of the property are re-examined – fees are incurred for the transfer of land charges, both for a forward loan and for regular follow-up financing.