Mortgage interest rates have been at unprecedented lows for several years. Currently, the interest rate for a 10-year loan for a borrower with a good credit rating is around 0.4%. Interest rates that were unimaginably low two years ago. For builders whose mortgage loans are due to expire in the coming years, this is a reason to be happy and to make significant savings. In this context, the question arises as to whether Forward loan makes sense for follow-up financing from the borrower’s point of view.
What is a forward loan?
With a forward loan, homeowners can secure follow-up financing a few years before their real estate financing expires. Many banks offer follow-up financing 36 months before the loan expires.
Anyone who opts for this type of financing should know, however, that the longer the period between the conclusion of the contract for the new loan and the expiry of the fixed interest rate for the old loan, the conditions for follow-up financing increase. The question quickly arises in which cases a forward loan actually makes sense.
How are interest rates likely to develop in the coming years?
Estimating the direction in which mortgage interest rates will develop in the coming years is not easy. According to classic economic opinion, the rapid new borrowing of public budgets in recent years should have resulted in inflation. And rising inflation means interest rates will rise in the medium term. In fact, the opposite is the case. On the other hand, rising interest rates will put the southern European countries under massive pressure and create new burdens. Against this background, interest rates are not expected to rise in the coming years. At most, a very moderate development in interest rates can be expected.
It all comes down to personal risk assessment
The question of what is mean by moderate interest rate growth cannot currently be answer by anyone. So anyone who decides on follow-up financing via a forward loan should first answer the question of what interest rate development they personally expect. Based on this assessment, offers from different credit institutions are then to be obtain.
If the expected interest rate is higher than what the bank offers, then there is nothing to be said for taking out a new loan.
However, it can still make sense to initially wait a few more months. The interest surcharge for follow-up financing decreases with each passing month. You should therefore be show how the interest rate for the follow-up loan will change when you get the offer. If interest rates fall and then lending rates actually rise, the interest rate discount on the loan may offset the interest rate increases.
Even small changes in interest rates have an impact on the annuity loan
In the following, it will be briefly shown again what effects even small interest rate differences can have on a loan. Background is that the decision for a annuity loan is taken because the future is perceived as too pessimistic and uncertain and the borrower concludes the contract now out of caution. In this case, a minimal interest rate difference of 0.1% is assumed at the expense of the annuity loan. With a financing of 300,000 euros, this difference affects the monthly annuity with only 25 euros difference. Viewed over 10 years, the difference is already 3,000 euros.
A few special cases where a forward loan makes sense
There are special cases in which it makes sense to take out a forward loan now. Anyone who is already aware of changes in their personal circumstances that will affect a follow-up financing should quickly take care of a forward loan, regardless of interest rate developments.
A small digression on this. When granting a loan, the bank always checks the creditworthiness of the borrower. The most important criterion for this is a secure employment relationship. But if you want to change your job or have to change, you will have to wait for a trial period in the first few months.
During this period, the employment relationship is associate with a risk from the Bank’s point of view. This can result in an interest rate surcharge or even, in the worst case, a rejection by the bank. In the case of a follow-up loan, however, the borrower only provides information about his current creditworthiness.
If he is in an employment relationship that is not limit in time or a trial period has been agree at this time, then he will receive the loan. If the living conditions then change between the signing of the contract for the forward loan and the payment date, this no longer has any effect on the new loan.
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