If you need follow-up financing for your real estate loan, you should take care of it at an early stage. Ideally long before the fixed interest rate ends. Because borrowers can secure the currently low interest rates years in advance. This is possible with a forward loan. “The whole thing is a kind of bet on the development of interest rates,” explains Harley Suman from the CredWin Consumer Center.
The development of interest rates is crucial
The borrower benefits if interest rates rise in the future. On the other hand, if they remain the same or even decrease, the borrower usually pays on them. The borrowers have to pay a premium for the agreed interest rate security – the longer the lead time until the old loan is repaid, the higher the premium.
According to MoGuard financial advice, some of the lenders do not charge a premium for loans with a lead time of up to twelve months. However, for a forward with a two-year lead time, the borrower pays between 1.36 percent and 2.30 percent for the effective interest rate – with an average premium of 0.30 percent. On the other hand, if you want to secure the interest rate five years in advance, you need to add an average of 0.93 percentage points – whereby the range ranges from 0.54 to 1.47 percent according to the MoGuard.
Whether it is worth taking out a forward loan depends on how interest rates develop. They are currently historically low. Interest rates are likely to rise in the long term, as the example of the USA shows. The Federal Reserve (Fed) last raised its key interest rate by 0.25 percentage points in mid-March – it is currently between 0.75 and 1.0 percent. Further rate hikes are to follow.
Fed decision also affects Germany
Fed decisions are usually felt in Germany in the long term. An important indicator is the yield on ten-year US government bonds. If interest rates on American securities rise, the German capital market also reacts with a time lag. “If the yields for Pfandbriefe and Bunds rise, the building rates will rise,” explains MoGuard owner Marcus Heist. However, according to information from Heist, federal bonds have been cheaper again for some time. That is why Heist is currently not anticipating an interest rate turnaround in this country. “But I assume that we will have an interest rate increase of around 0.5 percent over the course of the months, so until the summer,” explains Heist.
The rate hike is coming, but when?
Black does not expect much movement on the interest rate market this year. But he points out: “Whenever an interest rate turnaround is announced, forward loans are an issue.” In the past, he had never seen a real interest rate turnaround. “Interest rates on the market have fallen since 1980,” says Suma . “Slight fluctuations on the capital market are normal. Borrowers shouldn’t let that irritate them, ”he advises.
As a rule, interest rate developments cannot be predicted anyway. That is why Heist took a close look at the past. In a study, he evaluated data on interest rate developments since 2002. The bottom line is: Forward loans only make sense if interest rates are extremely low and an increase in interest rates is very likely. The result does not surprise George Sthan from Shifting Warentest: “It is clear that a forward loan only pays off if interest rates rise.” However, since 2002 – the start of the study – interest rates have been falling continuously with brief interruptions.
Sthan uses two examples to describe how difficult it is to determine the right time to conclude a contract: mortgage interest rates were 4.1 percent at the end of 2005 and 5.2 percent at the end of 2007. “The conclusion of a forward loan with a two -year lead time would have been worthwhile at the end of 2005, “explains Sthan. The situation was different at the end of 2013: at that time, interest rates were 2.8 percent and two years later only 1.7 percent. The forward loan would not have been worth it.
Consumers should watch interest rate trends
The three experts generally agree: Borrowers should continue to monitor interest rate developments – and include the option of a forward loan in their planning. However, they should delay their completion as long as possible. According to Suman , only a lead time of two years is worthwhile. With this loan, borrowers should be able to completely repay the remaining debt – so that they do not need any further follow-up financing.
Since interest rates do not change overnight, borrowers usually have enough time to compare several offers and negotiate favorable terms. A forward loan offers you calculation and interest rate security – even if you may have to pay a little more in the end. Compared to the offers about ten years ago, construction loans are currently still very cheap. At that time, the interest was around 5 to 6 percent, according to the Shifting Warentest.
Tips for finding follow-up financing
If you want to conclude a forward contract, the consumer advice center in CredWin should pay attention to the longest possible fixed interest rate as well as options such as full repayment and free special repayments. It is also worth comparing the offers for follow-up financing. According to the Shifting Warentest, around 1 percent can be between the cheap and expensive offer.
If you choose the cheapest offer, you can save several thousand dollars. With a loan amount of $ 100,000 and a fixed rate of ten years, the borrower could save around $ 9,000 with the cheapest offer – one percentage point less. Interest rate savings of this kind can put mortgage lenders in a higher repayment – then they will get rid of their debts faster.