Do you already own your own property, but the financing still needs at least one prolongation? Then it makes sense that you deal with the topic of forwarding loans.
Why? Investors groan under the low-interest rates, hardly get anything for the savings and borrowers can fulfill long-cherished wishes at historically low-interest rates or finally move into their own property.
What is the interest rate?
As with other loans, banks and credit intermediaries adapt their conditions for forwarding loans to market conditions. The conditions are updated at irregular intervals, sometimes longer, sometimes shorter.
With our calculator, you always have an overview of the current interest rates of a comprehensive selection of providers of forwarding loans.
You can easily calculate the amount of the monthly charge across all providers by entering the framework conditions for your future financing or follow-up financing in the calculator mask and then clicking the “Compare Forward Loans” button.
What is a forward loan?
A forward loan is a loan agreement that is concluded today but will only come into effect at a later date. The interest rate is based on the interest rate valid at the time the contract was concluded, which is marginally increased depending on the lead time – the forward premium.
As with any follow-up financing, the bank can be changed. There are also no costs for deleting the current land charge and ordering a new land charge. Banks accept a notarized assignment among themselves, which costs around USD 100. There are many good reasons for securing the low-interest rates of today with a forward loan for the future, but few that speak against it.
How long in advance is a forward loan possible?
Depending on the bank, forward loans can be concluded with a lead time of up to 60 months. The practice is usually six to 36 months. In our example, the borrower signs a loan agreement in 2016, beginning in 2018, in the amount of the remaining debt. To this end, the bank guarantees him that from 2018 he will have to pay the interest on the new loan, which was used in 2016.
Why choose a forward loan?
There is no room left for building interest
The fact is that building rates can hardly go down any further. Effective annual interest rates of less than two percent with ten-year fixed rates are likely to be the low point. Anyone who took out a ten-year fixed-rate loan five years ago must expect to have mortgage rates in five years that will be above the rate at that time.
In the worst case, the monthly charge increases despite partial repayment. This can become an incalculable risk, especially for property buyers who have been expecting an extremely pointed pen. If you want to avoid this risk, you should take the safe side today and secure the current interest rates even after the current commitment. Forward loans offer this security in the form of an interest rate guarantee.
The reasons for a forward loan in the overview
- A further rise in US interest rates expected in 2016/2017
- The economy in the USDozone on the up
- Stock market well above the pre-crisis level. Brexit shock also overcome.
- Interest rate hikes are expected in the medium term
- Building rates cannot actually go down any further
When is a forward loan worthwhile?
Forward loans make sense if there is an increase in building interest rates or the interest rate environment is very volatile. Every phase of interest has an end. This applies to low as well as high-interest rates. 2016 is characterized by historically low-interest rates. Our infographic illustrates once again how you can secure the currently low-interest rates with a forward loan:
An owner who still needs follow-up financing or prolongation in 2021 should take the time to use our forward loan calculator. Here he sees the costs that will be incurred.
On the other hand, these costs have to be balanced with the likelihood that mortgage interest rates will increase by then. The fact is that there is little scope for building money to sink even further. Negative interest rates on building finance are unimaginable.
The advantage of the forward loan is clearly the interest rate security. Despite the historically low-interest rates, an increase of more than 0.25 percent over the next twelve months cannot be ruled out. In this case, the forward loan would have paid off. The following infographic illustrates this advantage again:
Frequently asked questions
What does the guarantee cost?
The bank does, however, pay for this guarantee. Each month before the future loan is paid out, it calculates a marginal surcharge on the nominal interest rate. The surcharge depends on the lead time of the loan. With two-year lead time, the premium may be 0.01 percent per month, with a two-year lead time 0.03 percent per month.
The following example is intended to illustrate the effect of the interest premium, the “insurance premium”:
The interest premium is an important comparative factor. The following example shows the effects that even small differences in the amount of the interest premium can have on the sum of the interest payments:
Effects of the interested markup on interest payments
We assume that a builder will need follow-up financing in the form of a forward loan of USD 100,000 in 24 months. The loan is to be repaid in full within ten years. To this end, the builder obtains offers from three banks. All require a fixed borrowing rate of 2.00 percent per year but different interest premiums per month. Bank A requires 0.01 percentage points, Bank B 0.02 percentage points, and Bank C 0.03 percentage points. The resulting differences in the sum of the interest payments made are calculated as follows:
An interest premium of 0.01 percentage points per month increases the total interest payments on the forward loan in our example by 11 percent. Borrowers should therefore always use the sum of the borrowing rate and the premium to compare different offers. A bank with a higher borrowing rate can be significantly cheaper than a bank with a lower borrowing rate and therefore a higher interest rate spread at the end of the day.
From the banks’ point of view, the interest mark-up is perfectly justified. There is a risk for the institutions that they will have to refinance at a later time at higher interest rates than is covered by the margin of the forward loan.
The residual risk of falling interest rates
A volatile market environment also harbors a small risk. If contrary to expectations, the interest rate is below the interest rate at the time the forward loan is paid out, the borrower is still obliged to purchase it. In this case, he pays higher interest on the forward loan he has already taken out than now on follow-up financing. The following infographic illustrates this again:
The difference in commitment interest
There is also no commitment interest during the lead time. The banks calculate this if a loan is available for payment but has not yet been called up by the customer. This can be the case if the seller has not yet fulfilled all payment requirements.
The institutes calculate with a certain interest income from the day of the planned payment. As long as they keep the money in the house, they cannot bill the customer for the agreed interest. In this case, the provisional interest rate of 0.25 percent per month applies as compensation. The forward loan is not held ready until the payment date but is only made available on the payment date.
The time frame within the follow-up financing
Our infographic shows the time frame in which a forward loan can be classified within the planning of follow-up financing and the deadlines that builders should know:
Where can I get a forward loan?
Many borrowers assume that they can only take advantage of the forward loan through the bank where the current financing is running. That is wrong. A forward loan is nothing more than follow-up financing with an early contract conclusion.
It is, therefore, worthwhile to see which provider offers the most favorable terms at the time a forward loan is implemented. However, any interest rate negotiations with the current bank based on cheaper offers from competitors can also be successful. A change of institute is not mandatory.