Forward loan – meaningful instrument for rising building interest rates?

My name is birga oelrichs and I work as a construction financing specialist in the helgoland branch of volksbank stade-cuxhaven eg. Customers with financing are currently worried about the rise in construction interest rates and want to protect themselves. One instrument for this can be a forward loan. That is why we take a closer look at this issue.

What is a forward loan?

The forward loan is a way to secure follow-up financing at the current interest rate for your own property for the future. It concerns thus the extension of an existing financing after expiration of the zinsbindungsfrist – this procedure is called prolongation. The prerequisite is that the financing expires within the next five years at the earliest. The forward loan is valid only after the expiration of the original loan agreement.

The forward loan was once developed in 1996 to finance municipal and non-profit housing companies. Two years later, consumers also received the first offers for this financial instrument.

By clicking on the respective fixed-interest periods, these can be shown or hidden

The presentation of the interest rate development is based on the actual and daily updated conditions of volksbank stade-cuxhaven eg and partners of genossenschaftliche finanzgruppe volksbanken raiffeisenbanken. This is not a binding financing proposal.2022-10-29

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Advantages and disadvantages of the forward loan

The biggest advantage of the forward loan is obvious: securing the current interest rate level in the still ongoing financing phase to protect against further interest rate increases. Thanks to fixed conditions, you benefit from long-term planning security – a valuable commodity in today's world! Many experts do not assume that the construction interest rate will continue to rise massively. However, the factors of inflation and increase in the key interest rate by the ECB are not to be neglected and the current construction interest rate increase was also unexpected for experts. Looking back, the ideal time for a forward loan would have been at the end of 2021, when the interest rate was still around one percent for a ten-year term. This interest rate level would then have been secured and the current increase would not have affected you for the time being.

Since forward loans involve a certain risk for banks due to their future orientation, they hedge their risk by charging premiums. As a rule, this value is between 0.01 and 0.02 percent per month. At the same time, no surcharge is due for six months remaining term at volksbank stade-cuxhaven. A forward loan is possible here three years before expiration of the financing. With partners of the genossenschaftliche finanzgruppe, a period of five years can also be implemented in advance. To put it bluntly, a forward loan is a bet on further increases in interest rates. This is proven by a calculation example: if you turn to the volksbank three years before the end of your financing at an interest rate of 3.5 percent, you will pay the aforementioned premium for a forward loan for 30 months. Your fixed interest rate will then be up to 4.1 percent.

This circumstance would be particularly annoying for you if, for example, the construction interest rates were to fall back to the level of the end of 2021 in three years' time, as there is an obligation to purchase. However, if construction interest rates continue to rise, a forward loan would still be a good deal at this point in time.

When should I consider a forward loan??

In principle, this option is of interest to anyone whose financing is due to expire within the next five years. However, it is important to weigh up whether you want absolute security in terms of interest rates now and at the same time may have to pay a higher fixed interest rate in a few years than the market situation would actually dictate. So it all comes down to an individual case-by-case approach that takes into account the consumer's personal life situation.

An alternative to the forward loan offers the currently very attractive building savings contract. Because here the interest rate level is currently significantly lower and the advantageous interest rates apply over the entire term. You can find more information about home savings in the article by my colleague thomas noll.

If you need advice because of the rise in construction interest rates or if you are about to take out a follow-up financing, please do not hesitate to contact me or my colleagues. We look forward to talking with you!