Owning a property is the dream of many people: Around 80 percent of all Germans wish to move into their own four walls during their lifetime.
The time for follow-up financing is currently particularly favorable: interest rates have stagnated for months at a historic low and allow buyers particularly favorable loan conditions. Forward loans are the means of choice to secure the current low level of interest rates.
Use of the computer mask for forward loans
1. Net loan amount
In the foreseeable future your current financing is running. So you know the future financing needs and enter this at this point.
2nd repayment term
Enter here your desired repayment term of the forward loan.
Enter the postal code of the place where you live on the credit application at the time of signing. You may have a new post code in the future, but this is not required here.
Correctly, this point would have to be called lending outflow. This refers to the limit to which the object to be financed can serve as collateral.
The percentage refers to the mortgage lending value of the property, not the market value. The latter is identical to the purchase price. The mortgage lending value may deviate from this. Both up and down.
Therefore, consider what intrinsic value the property has at the time of the loan agreement.
Perhaps you can raise the repayment rate thanks to the low interest rate without changing the monthly burden. If that is the case, we advise you to do so. This will significantly reduce the term of your follow-up financing.
At this point, simply select from when your forward loan should take effect.
Free download: checklist for forward loans
You are currently considering financing in the medium term future? Our free checklist helps you to rethink the topic of forward loans in a structured way and to keep an eye on all important aspects.
Forward loans: securing favorable conditions for the future
The 2012 low-interest phase is bad for savers but good for borrowers. The current interest rates are still close to the all-time low and compensate for the rising prices for residential real estate.
Although banks have been gradually improving the interest rate on mortgage loans over the past few weeks, financing for buildings and land is still less than ever:
With just under two percent interest, buyers have to count on average to finance the dream of their own four walls – just ten years ago, a good six percent due.
Already one percentage point difference in terms and conditions has a significant impact on the credit burden: With a financing sum of 100,000 euros, this results in a difference of almost 10,000 euros over a period of ten years.
If you have already completed your mortgage lending years ago and need to complete follow-up financing in just a few years, you can look forward to a forward loan to secure the current low level of interest rates for the coming years:
Surf Tip: Compare daily rates for mortgage lending
Forward loan secures follow-up financing years in advance
Experts believe that inflation will continue to increase. Then, however, the lending rates will go up again – and make the purchase of real estate significantly more expensive. This does not only apply to initial financing, but also to follow-up financing, which is concluded as soon as the first fixed-interest period expires.
This is the case for most real estate loans after ten or fifteen years. Anyone who only just gets by with their credit burdens could experience a nasty surprise in a few years with new terms – and possibly get in trouble with his loan repayment.
With a forward loan, real estate financiers can protect themselves against such future scenarios reliably. Up to five years before the old loan expires, homeowners can use a forward loan to secure today’s conditions for follow-up financing.
It makes sense to conclude such a loan, but usually only with a time interval of three years – then the interest premium, the banks calculate with 0.01 to 0.03 percentage points per month.
Forward loans counteract rising interest rates
If interest rates are expected to rise in the future, borrowers will make good use of a forward loan. Of course, a little bit of risk is involved – because when interest rates fall unexpectedly, borrowers pay with the forward conditions. Only a few banks grant a call option – and if so, only for a high surcharge.
In general, it makes sense to enter into long-term interest rates for the currently low interest rates in order to secure favorable conditions for as long as possible. Higher repayment rates – for example, two instead of one per cent from the beginning – as well as regular special repayments bring a higher financial burden in the short term, but the property is so much faster paid off – and the financing is thus even cheaper.
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When is a forward loan worthwhile?
The development of interest from the completion of a forward loan until its payment is decisive for whether it is worthwhile or whether it would have been better to wait until shortly before the expiry of the fixed interest period for initial financing and to carry out a normal follow-up financing.
The interest rate advantage or disadvantage arising from the conclusion of a forward loan depending on the development of the construction interest is illustrated in our graph below:
When can a forward loan be terminated?
In principle, every loan can be terminated after ten years with a notice period of six months. This also applies to forward loans. The regulatory clause can be found in the Civil Code.
Section 489 (1) no. 2 defines that the borrower has the right of termination after full receipt of the loan amount. Should he make a new interest agreement with the bank during the term of the loan, the date of this agreement will no longer be the receipt of the money, but the date of this agreement as the new starting date for the calculation of the termination right.
The district court had to deal with exactly this fact in September 2015. The borrower followed the regulations of the Civil Code and announced in due time his forward loan at a time that would be reached ten years after signing the contract.
The bank did not accept the termination and insisted on a repayment of the loan as agreed. In their opinion, the right of termination applies only when the new conditions come into force and not with the previously signed contract signature.
An example case should clarify this:
Ms. Kuster is raising mortgage lending on May 1, 1995 to X percent. The interest is fixed for ten years. The contract runs until 30 April 2005. It is clear that in this short time they can not repay the mortgage lending and after the end of the fixed interest rate a direct subsequent financing must take effect.
On August 1, 2003, Ms Kuster agrees with her bank on the terms of further financing when the interest rate of the first loan has expired. She decides that she wants to lock in interest Y already now, in order to secure interest rates and to be sure of her planning. There is a fixed interest rate of 20 years and a full repayment at the end of these 20 years. This forward loan expires on April 30, 2025.
In 2011, Ms. Kuster decides to terminate her loan. The low level of interest rates following the financial crisis suggests this step.
According to BGB §489, she can do that ten years after signing the contract under the new conditions. Since it took out the forward loan on 1 August 2003, the earliest possible termination date would be 2 August 2013 (the day after the ten years have passed completely).
For a successful termination, they must submit a letter to the lender no later than six months before this date.
As a result, their mortgage lending at the previous bank ends in this way on 02 July 2013 and not only on 30 April 2025.
What happens after the successful termination of a forward loan?
Ms Kuster successfully claimed the termination. In summer 2013, she has not yet paid off her property. The original financing plan envisaged April 2025 for the complete repayment of mortgage lending.
Your previous bank has paid the cost of the property. Ms. Kuster has already repaid a lot, but the bank still has an open demand. This is due to Mrs. Kuster when the termination takes effect in one sum.
For this reason, Ms. Kuster must have signed a follow-on financing by which time she can settle her debts with the previous bank or savings bank.
As the new financing has a lower Z interest rate than the previous contracts, Ms Kuster can raise the amount of the repayment installment without increasing her monthly exposure. On the one hand, it pays less interest and, at the same time, finishes financing its property more quickly.
Significance of the right of termination for borrowers
If financing is already in progress and a forward loan is to be concluded, it is advisable to negotiate intensively with the previous bank and perhaps to give preference to it instead of switching at the appropriate time.
If the customer stays with the previous bank, the contractual signature for the forward loan counts for his right of termination, which in the example above was 2 years before the end of the previous financing.
If the customer changes the bank, the ten-year period begins for him only after receipt of the complete loan amount. For Ms Kuster, that would have been the case in 2005 if she had paid her previous bank with the new bank’s money.
Request a free and non-binding offer for a forward loan
If you would like to be supported by experts in planning your follow-up financing, we offer you the following opportunity to work out a free and non-binding offer: