When it comes to real estate financing, one speaks again and again of the so-called forward loans. But what exactly are forward loans and for whom is it worthwhile to conclude such?
In order to properly use a forward loan for personal mortgage lending, it is important to know how this loan works.
Interest rate hedging through forward loans
The basic idea behind a forward loan is interest rate hedging in the future. Anyone who signs a forward loan today can hedge the currently prevailing interest rate for up to five years. In practice, this means the following: Today a forward loan with a term of 24 months is completed. During this time, the customer pays no commitment interest, but only a small interest charge on the current interest. However, the repayment costs for the forward loan do not accrue until payment to the customer. After the two years of deployment, the entire loan amount is paid out and the customer only has to pay the amount of interest that was previously paid.
For whom is the conclusion of a forward loan worthwhile?
Forward loans are mainly concluded for follow-up financing and at low interest rates. Especially in times of low interest rates, it makes sense to hedge this for the future. Therefore, if you are already in possession of mortgage lending and it expires in two to three years but must be refinanced, you should consider making a forward loan. Securing interest rates for the future today means for the customer that no interest rate increase is to be expected despite rising interest rates. On average, when forward loans are issued, interest rates of approximately 0.7% are charged. However, if a higher increase in interest rates is expected, it makes sense to pay this premium for interest rate hedging.
Risks of forward loans
The only risk the customer possesses is a further reduction in interest rates. If the customer had hedged the current prevailing interest rate for the future, but the interest rates would continue to fall, it would be better in a few years to take out a loan at the prevailing interest rate level. Therefore, forward loans should only be concluded over a period of 6-24 months, since a realistic assessment of the further development of interest rates can be made here. For a longer period, an estimate is usually inaccurate, so it may be that the customer then has to pay higher interest costs.
Forward loan can only be used for real estate acquisition
Anyone who thinks that such an interest rate hedge would make sense, it should be said that forward loans can only be used for real estate loans, ie for loans that are secured by land register entries. For those who currently have a real estate investment or a real estate loan expiring in the future, it is currently particularly interesting to hedge a forward loan. For a few years, there has been an extremely low level of interest rates, which will certainly rise again in the future. So why not react quickly and secure the current interest rates for the future? With a forward loan, this is fast and easy.