The dream of having your own four walls became reality a few years ago. You pay off the loan required for this in monthly installments and have agreed a fixed rate of interest with your bank. In good time before the loan agreement expires, it makes sense to take care of the follow-up financing of your property.
As a rule, your house bank offers you a so-called forward loan. In many cases it is worth starting a comparison, which can save a few dollars for one or the other.
How a forward loan works?
With the option of a forward loan, the borrower secures the follow-up financing of his house up to 60 months in advance. This ensures concrete predictability with regard to the ongoing monthly charge. This way, you can also avoid surprises with the interest rate. Such a contract ensures immediate further financing after the old loan has expired and must be started in any case. In contrast to initial financing, there is no commitment interest.
For a credit institution, the uncertainty about future interest rate developments poses a risk. Therefore, there is a surcharge until the old funding expires. Based on the current interest rate level, many banks add around 0.02% for each month. The following two points are decisive for the decision: the remaining term of the old loan and the expectation of the development of the building interest.
The basic principle of a forward loan is an annuity loan, for which the bank also offers longer fixed interest rates. Experts like to compare this type of loan with a bet on rising interest rates.
Comparison of long and short lead times
The decisive answer to the question of whether a forward loan is a good or bad decision is reflected in your own assessment of future interest rate developments.
In the following calculation we use a current loan with an interest rate of 2.5%. If the current mortgage interest rate is around 3%, this does not mean that early follow-up financing is more expensive for you. The factor of building interest is of great importance, in particular how it develops up to the end of the old financing. If the borrower predicts an increase, he chooses the forward loan as a precaution. If, on the other hand, he expects interest rates to fall, it is better to take his time.
Example of a long lead time of 4 years
Based on the above example, a lead time of 48 months to the current interest rate level of 3% means an interest premium of 0.98%. Your bank will then offer you a total condition of 3.98%. If you choose this offer, you can expect a further rise in interest rates over the next 4 years.
Example short lead time of 2 years or less
With a shorter period of 24 months, we only speak of an interest premium of 0.48%, which brings the new total financing to 3.48%. If the forecast now predicts a significant rise in interest rates, you see yourself on the safe side.
With a remaining term of 12 months, banks no longer offer a forward loan, since the course of the building interest can be calculated more easily. In addition, it is worthwhile for the borrower to put together a completely new financing option, possibly with the acceptance of provisional interest.
Outlook for interest rate developments
The bills presented clearly show the advantages and disadvantages depending on the remaining time until the new financing. We are currently still in a low interest rate environment. However, the low point has been reached and there has been a slow rise in building rates for some time now.
Many borrowers value quick repayment of their property. Of course, the following applies: everything that is not spent on interest flows into the repayment and ensures faster debt relief. Assuming a residual debt of 100,000 dollars, an interest rate hike of 0.5% compared to the current financing costs a whopping 500 dollars more per year. With an increase of 1%, 1,000 dollars more will be spent each year. This corresponds to approximately 83 dollars per month.
Alternatives of follow-up financing for your property
Other options are possible outside of a forward loan:
- Interest rate hedging through a home savings contract
- Ordinary loan extension when due
- Debt rescheduling to another financing partner
You can complete a home savings contract at any time of financing. In a low interest rate environment in particular, you benefit from future interest rate security and know the monthly repayment rate exactly. The building society is happy to provide advance or interim financing for the savings phase.
Follow-up financing can be made directly when the first construction loan expires.
If you do not place as much value on knowing the future monthly charge and are also assuming a constant or falling interest rate level, this is a good alternative.
In addition, you have a statutory right of termination for your current financing after a term of 10 years. In addition to your house bank, it is best to make further comparisons and, under certain circumstances, to reschedule to another bank is cheaper. It should be noted that a change in the registration of the land charge must be made, which results in costs for the notary and land registry.
The expenses for a transfer of the land charge from the old to the new bank are lower than for deletion and new registration.
Support through financial advice
Owners often feel overwhelmed with the decision about follow-up financing for their house or apartment and can fall back on the necessary experience. Our experts are therefore at your side for detailed advice on current interest rate developments and future forecasts. In addition, we create an individual offer for you and take over the essential handling in communication with the old and new bank.
Various factors should be taken into account when choosing the right time for the following mortgage lending. With an expected rise in interest rates you are definitely on the safe side with a timely forward loan. In addition, do not forget about any special options in your financial planning.
Construction finance runs over long periods of time, in which a lot can happen. Everything flows in through clear salary jumps, inheritances up to winning the lottery. If you already know of a coming cash inflow, consider this when considering the new loan amount.