Forward loans are not actually a type of loan, but rather a so-called financing offer from the banks. Since a forward loan is concluded today for the future, it gives a borrower the opportunity to secure this interest in the future even before the current loan expires. With this protection, the borrower does not risk that the interest charge increases after the fixed interest period. The borrower is already concluding a loan contract with a fixed interest rate, which will replace his old loan after the fixed interest period expires. In addition, a forward loan can only be applied for if the mortgage lender already has a mortgage loan that will be available for follow-up financing in a few months. On the other hand, an application is not possible if the mortgage lender only decides to buy a property in a few years and wants to secure the favorable entry interest rate today.
How does a forward loan work?
The way a forward loan works is almost the same as that of an annuity loan, with the only difference that a loan contract is already concluded today, but it will only be called up in the future. As a result, the forward loan seamlessly connects to the existing loan as follow-up financing. The interest rate of the forward loan is calculated on the one hand from the nominal interest rate of the current loan. This is then added to the monthly remaining term of the current loan. There is also a pre-determined surcharge. How far a customer can agree on the new interest rate to expire varies from bank to bank.
The payment of the monthly installment for the forward loan begins when it is paid out, and commitment interest usually accrues for the time until it is paid out. Currently 0.015 to 0.045 percentage points per month are common (as of 03.2011). The fixed interest rate for a forward loan is between five and twenty years and can be completed 12 to 60 months in advance. The longer it takes for the borrower to take out his loan, the higher his monthly borrowing rate will be. Example:
- Forward loan as follow-up financing, fixed interest period 10 years
- Closing takes place three years before the follow-up financing is due
- Assume that the borrowing rate is 4.95 percent and the interest premium is 0.01 percent. In this case, the borrower pays 5.31 percent interest on his loan over 10 years (4.95% + 0.36%)
Mortgage lenders who use a forward loan then only have to pay the fees for the transfer of the land charge. Overall, forward loans are particularly suitable for all those whose fixed interest rates will expire in the next 1 to 5 years. With the forward loan, borrowers then secure their current interest rate. But be careful: this calculation only works if the interest rates actually rise in the future. If, on the other hand, interest rates remain the same or even go down, in the worst case there will be negative business. The mortgage lender bears a certain risk, because on the one hand the person who concludes a forward loan has to accept it later, on the other hand nobody can predict the development of future interest rates today. The loan must therefore be accepted even in the event that interest rates are already clearly falling again in the meantime.
Of course, the borrower has the option to cancel the forward loan (but this is not possible with all banks!), But in return a corresponding prepayment penalty will apply. Prospective buyers should therefore use so-called “short-term cancellable forward loans” in uncertain times. In this case, the borrower then has the option of terminating the forward loan, for example, until the end of the next quarter against a corresponding interest premium. At the same time, he now has the opportunity to switch to a cheaper loan – and without any prepayment penalty. A forward loan that can be terminated at short notice therefore offers the mortgage lender a significantly lower risk.
Compare and calculate conditions for forward loans
You can use our calculator to determine which interest rates banks and brokers currently offer for forward loans with specific lead times:
Debt restructuring options by the borrower
More and more builders and homeowners are using a forward loan as a follow-up annuity loan. Anyone who receives such a debt rescheduling option through their lending bank should definitely compare and not accept every offer without asking. Often, a corresponding bank change can save several thousand USD. Most funding institutions also offer corresponding forward loan financial calculators on the Internet, for example on the Internet platform. The surcharges can also be calculated accordingly, because the shorter the lead time, the lower they are. The higher the premiums for a forward loan, the greater the indication that interest rates will rise in the coming months or years. The loan amount of the new contract corresponds to the remaining debt of the old loan on its expiry date.
Borrowers should bear in mind each time they use a forward loan that the respective employees of the financial institutions almost always assume that interest rates will rise. On the one hand, these are only assumptions, on the other hand, this is also justified by the fact that energy prices are also constantly rising, accompanied by rising inflation. However, these assumptions are not factual. Rather, the average interest rate over the past 10 years should be used as a benchmark, and this was around 6.5 percent. This shows whether the mortgage rate corresponds to a low or a high rate phase. This shows that there may well be excellent consultants with excellent specialist knowledge in the mortgage lending business, but unfortunately none of them has a crystal ball, which would ultimately not be useful.
So if you want to calculate an exact real estate financing, you need different factors and aspects, which should be divided into several steps if possible. Because every step in turn has a corresponding impact on overall financing. At the beginning, therefore, there must be the determination of the debt. So the borrower needs to know what his real estate loan is. This first step has a huge impact on all others, because it shows the amount of equity accordingly. The more of this there is, the lower the need for outside capital. The calculation:
After this first step, the loan forms that can be financed are determined in a second. In addition to a home loan, this can also be a mortgage loan. The monthly rate is then determined on the basis of the loan amount and the respective interest rate, which then represents the total charge. The borrower must then bear this monthly for a longer period. Example:
If the loans listed in the example expire, the forward loan takes effect. The benefits are even greater if government subsidies such as child benefit have expired in the past and these revenues, which are no longer available, have led to a contribution burden on the property. The ongoing increases in energy prices such as gas and electricity have also made themselves felt in recent years, and these additional costs are also increasing the budget considerably. If, in addition to the cosmetic repairs, there is also a new heating system, it quickly becomes financially tight. Anyone who still has money left for their studying children – probably that. The financial consideration in the form of a forward loan is now that this game of increasing the monthly mortgage rate does not continue “indefinitely”. In this context, the mortgage lender should also be clear about keeping his property in his portfolio until the forward loan expires, in order to avoid possible prepayment penalty.
|With a forward loan, however, the property owner and borrower do not buy the right to follow-up financing at a predetermined interest rate, which can expire if one is no longer required! Rather, the borrower enters into a specific loan relationship with his financing bank, the effectiveness of which begins after 14 days (statutory cancellation period). Termination is only possible in certain cases, e.g. when the property is sold.
If you are not sure about the conclusion of a forward loan, you still have the option to secure the exit option in addition to securing the future. This is done through a large number of follow-up loans on the market with the right to terminate. Another option is the so-called cap credit. This is a loan with variable interest rates and a fixed interest rate cap (the cap). The borrower also benefits from interest rate cuts by linking to money market rates during the year. At the same time, the risk of an interest rate hike can be limited by a guaranteed maximum interest rate.
However, a security premium is due for the assurance of the upper interest rate limit. But the Lite Lender is particularly characterized by its flexibility in terms of repayment, making the loan business more calculable for the borrower.
Alternative 1: There is a possibility of rescheduling when the loan expires and the lender can also be changed without any problems. After applying for a loan from the new lender, the mortgage is assigned by the old lender. The assignment takes place between the banks, the borrower should only plan a processing period of four to six weeks. In most cases, the new bank also evaluates the property free of charge.
Alternative 2 : If a loan has a total term (fixed interest period) of 15 years, of which 10 years have already expired, a debt rescheduling can be carried out in the event that the market has a correspondingly low interest rate at that time. This is the case law in favor of the borrower, who is basically entitled to repay his loan in whole or in part after 10 years (section 489 (1) no.3 BGH). The borrower only has to give 6 months’ notice to cancel their loan with the existing bank.
Alternative 3: Many borrowers do not want to wait until the end of their fixed interest rate with a debt rescheduling and therefore choose the option of a forward loan in order to avoid the risk of rising interest rates. However, this option only applies to loans with fixed interest rates that expire in a maximum of three years. Clarification is also necessary, because not every bank that provides credit is willing to do so. In the event of a redemption at the old bank, an offer from another bank is now required. In order to make a financing decision at the new bank, the borrower must bring all property documents.
Alternative 4: Borrowers can make early debt rescheduling within an existing loan. However, the approval of the financing bank is required for this. Not all banks agree to early loan termination here – they are not even obliged to do so! If the bank declares its consent, the borrower has the right to cancel his loan within a period of 6 months. If the loan is terminated prematurely, banks have the option of claiming a prepayment penalty with an additional surcharge of up to 100 percent according to current BGH case law. Costs between 5 and 10 percent calculated on the total loan amount quickly accrue here.
Borrowers have many options, as the various examples show. Ultimately, however, everyone has to decide in their own individual way.
The subordinated forward loan
Anyone applying for a forward loan usually has to secure their loan with a first-rate land charge. If the borrower already has a land charge entry, this can be assigned to the new bank from the old bank. This in turn is associated with significantly lower costs for the borrower. This loan from the new bank must now also be secured in the form of a senior land charge in the land register. However, an exception can be made. Because in many cases follow-up financing is desired at a time when there is already older financing for the same financing object.
Example: A family financed their former condominium worth 120,000 USD through two loans: the first loan of 100,000 USD had a borrowing rate of 10 years, the second loan of 20,000 USD a borrowing rate of 5 years. In the end, the loan of 20,000 USD should be repaid entirely from own funds. For this reason, this combination was chosen in our example. However, due to major restructuring measures, these own funds were no longer available. It was therefore decided to secure this share of the financing with a forward loan. If the family does not receive a correspondingly attractive offer for follow-up financing from the current financing bank, they can either redeem the corresponding loan or reschedule to another bank, but the current financing bank remains a senior creditor in the land register.
Although the family only wants to finance the small part in the amount of 20,000 USD, the new bank that carries out this follow-up financing will always stand behind the primary land charge. This in turn brings with it the problem that the family will not find a financing provider at all for this constellation. This problem can be avoided with a subordinated forward loan.
The loan-to-value loan
A loan-to-value ratio is to be understood as the percentage that falls under the external financing. And it also represents the long-term achievable sales price of the property to be financed. The bank estimates between 70 and 90 percent of the actual purchase price. This serves as risk protection for the bank in the event that the borrower no longer meets his monthly obligations. The mortgage lending value thus serves the long-term risk assessment by the lender (so-called mortgage lending limit).
Within the mortgage lending value, a distinction must be made between owner-occupied property and rented property. If you own your own home, the mortgage lending value is based on the real value of the property (land value, building value). In the case of rented properties, on the other hand, the mortgage lending value is based on the estimated income through permanently achievable income. In order to be able to counter any fluctuations in the interest rate market, the credit institutions levy a security discount, which can be between 10 and 20 percent. The loan-to-value ratio thus reflects the relationship between the nominal amount and the loan value.
In order to determine the mortgage lending value of a property, this can be calculated in advance by each property owner himself under 1.3.1. For the bank, however, an appraisal by an independent building expert is required. In this way, interested parties can influence the conditions that the banks offer their customers for real estate financing in advance. Only those who correctly assess the value of their property will receive a correspondingly low building rate. So if you want to save a lot of money for your financial structuring, you should plan the loan expiration accordingly in your financing in addition to your early calculation. Example:
This example makes it clear that prospective buyers of forward loans should always make sure that the bank takes into account any mortgage loan deductions. An optimal comparison therefore always takes place under identical conditions by specifying the loan amount and the market value of the bank to be financed. The result of the banks in this calculation then always includes all customary bank surcharges and discounts that arise depending on the loan amount. However, if the market value is calculated by the banks, it rarely turns out to be identical for all. However, a different market value again has an impact on the interest condition, which can be significant.
New standard in property valuation
The value of a property depends on many factors. Not only the experience of the expert counts for the evaluation, but also constant market and economic observations. Therefore, experts do not rate real estate as a statistical system, but as a dynamic economic asset, the value of which is determined not least by private, economic and social events.
How to calculate the value of a house
With the market-oriented valuation of a house or a condominium, the sales success depends on and fails here with many. Buyers and sellers have to be clear about what their house is really worth and have to be aware: Even if it hurts at first, the value of an object is always exactly where supply and demand meet. For example, it is conceivable that a house or condominium in the same district could easily cost 15,000 USD more or less; This is despite the fact that both houses are equivalent in size and equipment – but they can differ in their surroundings. These criteria, which can have a significant impact on the price, are, for example, south-facing / north-facing, residential street / thoroughfare or a clear view or a view of the upstream buildings.
Another aspect is the evaluation of the offers. The purchase price, living space, plot size, construction method, features (i.e. basement and attic expansion for houses or the number of residential units in a property for condominiums), garages or parking space and, last but not least, the assessment of the direct location are of enormous importance. Not to forget that the most important thing when selling real estate is the location and always the location. Remember that a beautiful carpet, the new wallpaper on the wall or the hobby room that you have painstakingly expanded are generally not decisive for the purchase.
Therefore, prepare yourself for the visit and the sales talk in peace. When opening the conversation, it is important whether the contact is the first to get to know or a follow-up appointment. Therefore, come to the facts right after the opening of the conversation. Give the prospect all the information he wants; do not try to gloss over clear facts or even cover them up. The slightest insincerity that the buyer notices can end the sales pitch.
You can use the following questionnaire to calculate your house or apartment with certainty. Enter your points, you can also use intermediate values, but do not give any minus points.
The alternatives to the forward loan
There are only a few fully-fledged alternatives to forward loans. If you want to hedge against rising mortgage interest rates, you can also achieve this with interest rate derivatives. But this alternative is far too speculative for real estate financing. On the one hand, the value can be multiplied, but in reverse, the entire system can also become worthless. This type of protection is also quite expensive. But even the conclusion of a building society savings contract is not a real alternative, because if you wanted to secure at least 50 percent of the remaining debt of 120,000 USD in 3 years, for example, you could only achieve this through a building society contract worth 60,000 USD. The monthly contribution required for this, which would be between 800 and 1,200 USD, would no longer be sustainable for most.
An alternative would be the option of a special repayment within an ongoing financing. In this way, the current repayment at the time of follow-up financing could be drastically reduced. Another alternative to the forward loan would be to immediately repay the loan by repaying the loan through new financing. If, however, at least ten years of the fixed interest period have not yet expired, the banks only have to agree to immediate termination in exceptional cases, such as when the property is sold. Interest savings can also be made with a savings plan. However, most savings plans that are used to save capital for real estate financing are based on investment funds. However, the average expected performance is an annual percentage between six and ten percent.
But here too, the higher the expected return on a fund, the higher the risk. In the worst case, the entire stake can be lost, even if total losses are uncommon for non-leveraged investment funds. However, a price drop of over 50 percent in a year is realistic and must be taken into account. It is therefore by no means certain that the desired capital will actually be available when it is needed. A high risk for every mortgage lender.
Secure low building rates now up to 60 months in advance
If you want to secure low interest rates for your follow-up financing now, you can request a free financing offer from our partner, Interhyp AG.