When mortgage lending is nearing the end of its term, but a certain amount of the loan is still open, many borrowers wonder how to proceed.
On the one hand, there is the possibility of normal follow-up financing, on the other hand, the forward loan is also an alternative. In the following, we will explain in more detail what advantages and disadvantages the two variants have and what needs to be considered.
The Forward Loan – What Is It Exactly?
A forward loan is an annuity loan, the completion of which requires certain conditions. Here, the loan amount taken out is only paid out later – usually when the loan from the old bank is to be rescheduled. The special thing about a forward loan is the lead time of up to five years.
If the interest on such a loan is cheap at the current time, it is advisable to close the forward loan as soon as possible. The period between the conclusion of the contract and the payment is also known as the forward period. The big advantage over other forms of loan is that there is no interest on the forward loan for this period – but only when the term actually begins.
What distinguishes normal follow-up financing?
Follow-up financing, which is also referred to as prolongation, usually takes place with the current lender. It represents a clear difference to debt restructuring and is associated with significantly less effort for the borrower. Because while a rescheduling can incur costs for changes in the land register and other fees, there are no costs if you stay with the current bank.
One disadvantage, however, is that the interest on follow-up financing can usually only be secured a maximum of one year in advance – the forward loan is clearly ahead here.
Which type of financing is suitable for the individual borrower depends primarily on the individual situation, but also on the conditions and the remaining term. Therefore, no general statement can be made about which solution is better for you – this is always decided on a case-by-case basis.
Often a cheaper solution: This is how the forward loan works
A forward loan can be particularly suitable for homeowners in phases with low interest rates if they have to deal with follow-up financing in the coming months or years anyway.
When the initial financing is completed, the bank and the builder determine a time period for the interest rate commitment on the construction loan. If the amount borrowed has not yet been paid off even after the end of the fixed interest period, the question of follow-up financing arises. For this, a new interest rate is negotiated, which always depends on the current interest level on the market. There is a risk here that interest rates will increase drastically and the customer will pay more than for the first loan.
This is precisely the reason why there is a forward loan: With this, it is possible for borrowers to secure favorable interest rates for the second financing up to five years in advance. This gives him maximum security, since he doesn’t have to worry about whether the interest at the start of the second financing is more expensive than before. The borrower can therefore access it at the best time and reserve attractive conditions well in advance – so he knows exactly what his loan will later cost him. However, most banks generally charge a small premium, which is around 0.01% of the total.
If a forward loan is concluded, the interest at the time the contract is concluded between the bank and the borrower always applies. However, if the situation on the financial market indicates that lending rates will decrease further in the coming years, the bank may even waive the premium. The likelihood of this is particularly high if the new term is only a few months in the future anyway.
What are the differences to traditional follow-up financing?
One of the biggest differences between follow-up financing and the forward loan is that the latter does not have to pay interest to the bank during the lead time. However, he undertakes to accept the forward loan after the expiry of the loan agreement – this also applies if interest rates develop in his favor and follow-up financing can be concluded even cheaper.
As a borrower, you are obliged to fulfill the contract and thus also to pay the agreed interest. If you do not want to take advantage of the loan when it starts, the lender will ask for non-acceptance compensation. This is similar to prepayment penalty in the event of early termination. On the other hand, the lender must also adhere to the contractual terms, even if the interest rate should change later.
Why follow-up financing can still be worthwhile?
Despite all the advantages that the forward loan brings, there are some reasons why follow-up financing can also be profitable. It is of course the more convenient solution if a second loan is needed. Because the bank advisor is familiar to the borrower, he knows the personal situation and the financial situation.
If you want to make follow-up financing with the same bank, you usually only have to sign a new contract and everything is done. However, changes to the land register or other measures are not necessary – in the case of debt restructuring, on the contrary, which causes additional costs. Another clear advantage is that the previous lender will not carry out another credit check. However, if your own credit rating has deteriorated in recent years, this can become a problem for a new bank – because it will definitely check the borrower’s credit rating.
However, borrowers still need to be aware that the previous bank is not obliged to offer follow-up financing to its customers. But then she has to inform the borrower about it at least three months before the end of the first loan term.
It often happens that banks do not make too much effort when preparing an offer for follow-up financing, but expect that the customer will not switch to another bank anyway. In fact, most customers have opted for the same bank again since they shy away from the additional effort or costs.
That is why, as a customer, you generally have good chances if you want more favorable conditions and may even submit a more attractive comparison offer. Normally, every bank strives to keep a loyal customer and is therefore happy to accommodate them. In order to have a good argument in hand, it is advisable to look for suitable offers early on as a borrower.
It is best to look for alternatives about one and a half to two years before the first rate fixation expires and to keep an eye on the current interest rate market. Then, in the end, the decision is easier to make.