Forward Loan

A forward loan is a special type of follow-up financing. If, for example, you still need follow-up financing to settle the remaining debt after the fixed interest period has expired, a forward loan is used here. This form of loan is taken up immediately after the expiration of the previous loan and then continues the repayment of the remaining debt and terminates it.

With the help of this form of loan, follow-up financing can be contractually agreed and fixed before the initial loan expires. Depending on the agreed interest rates and the conduct of the bank, this may be up to 60 months in advance. If, for example, a construction loan ends in 36 months, the borrower can already now secure the follow-up financing in the form of a forward loan. The current interest conditions can also be fixed for a later date.

The procedure in practice

A legally binding contract for this form of loan is agreed with the bank. Such a forward loan then starts on the contractually agreed date in 24, 36 or 48 months. When the contract is concluded, the essential key data such as effective and nominal interest rate, loan scope, term, interest commitment and repayment rate are determined. Additional conditions can include, for example, repayment rate changes and the option of a special repayment right during the term.

When does it make sense?

A forward loan makes sense if the current interest rate situation is considerably below the long-term average and the interest rate outlook points upwards in the coming years. If you then conclude a loan agreement now for a period of several years for later, there is the possibility of fixing the favorable loan interest rates also for the future. This also includes the current interest rate situation in which we find ourselves today, because experts expect interest rates to rise in the coming years.

Such a loan is not recommended if you are in a high-interest phase and the interest rates are considerably above the long-term average, because then the poor conditions are also fixed for the follow-up financing.

Advantages

In a low-interest phase, borrowers can use this type of loan to secure favourable interest rates for subsequent financing. This lowers the costs and therefore a building loan can be easily calculated over many years. If the interest rates then climb up in the following years, you can save a lot of money. As an example: An increase in loan interest rates of two percent compared with the first loan increases the cost of follow-up financing of 150,000 euros by around 250 euros per month. If the follow-up financing runs over 10 years, there will be additional costs of 30,000 euros.

The disadvantages

Such financial statements are legally binding and must then be adopted. This is disadvantageous if you speculate and the interest rates fall and do not rise and therefore you pay considerably more than if you would have waited and then conclude at a much lower interest rate.

Costs

The banks charge a time-dependent fee for the long-term fixing of the currently valid interest rates. The interest rate for such a loan execution depends on the market and the lead time. As a rule, an interest premium of 0.01 to 0.05% is calculated for each month until the loan is disbursed.