What do I have to look out for with a forward loan?December 22, 2019
It is not for nothing that forward loans are one of the most popular types of follow-up financing on the market – because they offer more planning security than any other. Borrowers know even before the loan begins how much it will cost.
This is due to the fixed rate fixation, which also entails some risks. Because, of course, it is difficult to predict whether interest rates will rise or fall in the coming years – accordingly, the right time to close is extremely important. We present what to look out for when taking out a forward loan and how to find the right bank.
What are the advantages of a forward loan?
Probably the greatest advantage of a forward loan is that it provides the greatest possible security for your own building finance in the long term. It is particularly worthwhile if interest rates are currently at a low level and it can be assumed that interest rates will tend to increase in the coming years. In this case, the form of credit provides a solid basis for the years to come.
In addition, the borrower benefits from greater flexibility in terms of follow-up financing: he can decide which interest rate he would like to secure by accessing it at the right moment. A suitable forward loan can be taken care of five years before the first term expires. Of course, this is associated with a surcharge that is calculated by most banks but is only around 0.01%.
What should borrowers look out for when applying for a forward loan?
In principle, a forward loan can be used for all types of construction finance. However, borrowers should be aware that there may be special conditions with some banks regarding the deadlines. A forward loan is usually granted by banks if the fixed interest rate on the first loan is no more than three years.
The unique selling point of a forward loan is above all its interest-free lead time. With a normal loan, the borrower usually has to pay commitment interest to the bank after six to twelve months, but with a forward loan, it is different. Here the loan is only paid out after the end of the first loan.
It must also be taken into account that banks charge a special surcharge for a forward loan. The amount depends primarily on how much time passes until the payment and how interest rates develop in the financial market. If you already know today that interest rates will rise in the coming months, it is advisable to react promptly and to opt for a forward loan. If, on the other hand, interest rates are likely to go down, you should take the risk and wait a little longer before signing a contract.
Important questions before applying for a forward loan
Below we present some important questions that need to be clarified before taking out a forward loan.
When is the loan needed?
Forward loans usually pay little if you need the loan amount as soon as possible. If financing is to be available in less than 36 months, this type of loan is not the right one.
A normal loan is an alternative here. If you have more time, on the other hand, it is recommended to look around the market for cheap forward loans over a longer period of time and then access them at the right time.
Is the loan required for new or follow-up financing?
In principle, forward loans are not suitable for realizing initial financing. On the one hand, the interest premium is significantly higher compared to a regular loan, on the other hand, this loan cannot be adjusted later: If the interest changes after the contract have been concluded, the borrower has none of it. Only the interest rate determined when the contract is concluded applies.
This contrasts with the forward loan for follow-up financing: Here the loan is a good choice, provided the general conditions are right.
How will interest rates develop until my forward loan is taken out?
If it is foreseeable that higher interest will be incurred at the beginning of the loan than at the current date, borrowers should secure the still favorable interest at an early stage.
Whether a forward loan is worthwhile for you depends on whether the interest premium charged by the bank is still cheaper than the cost of normal follow-up financing. Here it is necessary to carry out a corresponding calculation.
Forward loans are always binding
Anyone who decides to take out a forward loan should be aware that this is a binding contract. Although you have a right of withdrawal within 14 days, in which you can cancel the loan again without additional costs – after that, however, this is only possible in connection with the non-acceptance fee.
This is a kind of claim for damages, which the bank charges the borrower if, contrary to expectations, the borrower does not want to use his loan. Therefore, such a contract should never be signed lightly or hastily if you are not sure.
When funding is tight, security is all the more important
Forward loans always require careful planning and calculation. Despite certain risks, however, it cannot be denied that such a loan primarily brings security – and more so than any other form of follow-up financing. So if you are concerned that a planned follow-up financing could entail high, unpredictable costs, you will be reassured by taking out a forward loan.
Forward loans are particularly recommended for borrowers whose financing is very tight or whose repayment is already at the possible upper limit of their financial scope. If the income is just enough to be able to pay repayment and interest, a forward loan makes sense in any case. Because if interest rates continue to fall or stagnate, then expensive forward loans are not pleasant, but they are not a broken leg. If, on the other hand, interest rates suddenly rose and the additional costs could not be borne, this could mean financial ruin in the worst case.
If you currently still pay off an old loan that has been running for more than ten years, for example, you will pay less for such a loan than it did then. So the forward loan would be a profitable undertaking anyway.
However, it is important not to let yourself be rushed into a supposedly good offer before taking out a forward loan, but to take the time to compare different offers. This is the only way to get to know the current interest rate level in the market and to decide for yourself whether a certain forward loan is cheap or it is better to wait for another offer with cheaper terms.