Follow-up financing represents a financial risk that should not be underestimated for both property buyers and builders. Because: If the interest rate rises during the fixed interest period, the entire construction financing may become drastically more expensive.
This risk can only be contained with a repayment loan. This means that the borrower pays off the entire loan during the fixed interest period. However, this option is usually only suitable for borrowers if they have a correspondingly high income. Here, the forward loan is a cheap alternative. In the following guide, we will introduce you to what it is and how it works.
The Forward Loan – What Is It Exactly?
Forward loans can only be used to carry out follow-up financing after construction financing. This means that as a borrower you have to have completed real estate financing in order to apply for a forward loan from a bank. Until a few years ago, only non-profit or municipal housing associations were entitled to such a loan – today, however, more and more private borrowers are turning to the offer for such a loan.
The basic principle of a forward loan is primarily based on being able to conclude new loan agreements before the end of the fixed interest period – this is how you can secure particularly favorable interest rates in the future. Strictly speaking, a forward loan is nothing more than an ordinary annuity loan, the rate of which is always the same.
What is special about it, however, is that the payment date for the loan can be flexibly postponed. In this phase, the borrower does not have to pay any installments and there is no lending interest from the lender. For this reason, you should let the lender make a non-binding offer in advance.
Never without comparison: This is how the forward loan works in detail
A forward loan enables borrowers to benefit from favorable interest rates even during the phase in which real estate financing is still within the fixed interest period for a few years.
The situation is different with normal follow-up financing, which can only be concluded about 6 to 12 months before the end of the fixed interest period. Depending on the conditions of the lender, this may result in expensive commitment interest for the borrower, although this is not the rule. The disadvantage is clear that a subsequent loan cannot be planned in the long term, but always only before the end of the fixed interest period.
Here you have a decisive advantage with the forward loan: The borrower has the opportunity to secure favorable interest rates for the future many years before the end of the fixed interest period. Financial experts also refer to this period as the so-called forward phase.
The interest rates that accrue for follow-up financing correspond to those for a forward loan at the time the contract was concluded. The lender may add additional interest depending on the lead time. This approach is basically only fair, because if interest rates increase drastically, the lender may have to forego a high return through an inexpensive forward loan. However, the lender benefits from good conditions and can plan safely for many years.
Plan long term with an offer for a forward loan
Forward loans ensure enormous planning security for follow-up financing for construction projects or property purchases. As a borrower, you can secure yourself cheap interest rates many years before the end of the fixed interest period, so that you know exactly what the costs will be. Most lenders can apply for a forward loan up to five years before the payment date. As a result, it is possible that borrowers will not have to take any financial risks for the next 20 years and know exactly how much they will have to pay – to the cent.
The maximum length of time without commitment interest between the conclusion of the contract and the time of payment depends on the respective lender.
Depending on the lender, very different conditions can be set here. In principle, a forward loan can be taken out if the real estate financing will not run for more than five more years. A loan comparison should also be carried out before taking out a forward loan. The easiest way to do this is via the Internet, where you can compare the individual loan offers free of charge.
Real and fake forward loans – what are the differences?
If you want to take out a forward loan, sooner or later you will come across the terms “real” and “fake” forward loans – but what exactly are they? Basically, the real forward loan refers to a follow-up loan with an interest rate fixation in the future, the terms of which are already clear at the time the contract is concluded. Every month that passes before the loan is paid out, lenders may charge an interest surcharge. This averages between 0.01 and 0.04 percent of the loan amount and always depends on the lender. It can also happen that the lender does not charge any additional interest at all.
This contrasts with the fake forward loan, in which the new fixed interest rate begins immediately when the loan contract is concluded. Nevertheless, the payment will only take place when the existing financing has completely ended. Up until the point of redemption, there is a phase without commitment interest, the conditions of which depend on the bank, however.
What is the cost of a forward loan?
The cost of a forward loan varies depending on the bank. On average, interest rates can be between 0.5% and 1% of the total loan amount – it is worth comparing them here. In general, if savings banks and banks require higher interest premiums for the forward period, then it can also be assumed that the interest rates for building money will increase.
The forward loan and its impact on the land charge
An aspect that should not be underestimated in the case of subsequent financing is the fee that is payable by changing the land charge. If a new bank takes over subsequent financing after the end of the fixed interest period, the land charge must also be adjusted accordingly in the land register.
For this reason, quite a few borrowers are afraid of changing the bank so that these costs are not incurred. And a change in the land charge can well add up to several hundred euros. However, nowadays there are more and more banks that want to win potential new customers by paying these costs. So it can pay off if you pay attention to it when making a comparison on the Internet.
Continuing mortgage lending: Who is currently benefiting from taking a forward loan?
As with an annuity loan, borrowers also want a forward loan to benefit from the lowest possible interest rates for the future. Strictly speaking, this is nothing more than an interest rate bet. If the interest rate increases in the future and exceeds the previously set interest rate, the forward loan will definitely pay off. But if interest rates fall, then as a borrower you pay more for your loan than is actually necessary.
You should be aware of this risk – however, the forward loan offers another decisive advantage: As a borrower, you can plan your building finance without any speculation. So you know many years in advance how high the monthly installments will be. There are no nasty surprises like sudden interest rate hikes and other costs.
In conclusion, it is still advisable to always carry out a comparison first in order to find the current cheapest offer.