Real estate financing: comparison of forward loans
Anyone who buys a house or apartment has to dig much deeper into their pockets than in previous years for financing. The days of zero and low interest rates are over, building interest rates have risen sharply since mid-2022 and are now around four percent again. Future real estate owners can and must take this into account. For many owners, however, whose previous financing is about to expire, this could become a problem. Follow-up financing is already significantly more expensive and the conditions are getting worse and worse. Further rate hikes by the European Central Bank are expected.
This can sometimes become a problem for borrowers. A forward loan helps. This is because owners can protect themselves against further interest rate increases and at least secure the current interest rate level for the future. “If you knew that interest rates would be lower a year from now than they are today, you wouldn’t have to worry about forward loans; but unfortunately that’s not the case,” says Max Herbst, head of FMH financial advice.
Anyone who sees it the same way should at least think about such a safeguard. “It’s always worth clarifying the options for follow-up financing at an early stage,” agrees Bernhard Syben, Sales Director at Sparda-Bank West. If the fixed interest rate of the existing real estate loan ends in less than 36 months, you should take out a forward loan for the time after that.
“Whether a forward loan ultimately pays off depends on the extent to which interest rates will rise,” but Syben also points out. Interest rate cuts would not really go with the current news situation. “Inflation and property price developments have not yet stabilized,” he says. “It is likely that construction interest rates will continue to rise in the second half of 2023.” Experts are convinced that forward loans continue to make sense even in the current market situation. “On the one hand, this gives the customer planning security at an early stage,” says a spokesman for Commerzbank, for example. “On the other hand, the forward premiums are at a very low level.”
An overview of the current conditions is provided by the exclusive FMH financial advice ranking for WirtschaftsWoche. The conditions for forward loans with a lead time of twelve months and a fixed interest rate of ten or 20 years with two percent repayment and a five percent special repayment were analyzed. The property value is 400,000 euros, the loan amount is 200,000 euros. “Anyone who should opt for the security of a forward contract will quickly realize that the forward offers, especially the top offers, are sometimes offered with no or very little forward surcharge,” confirms FMH boss Herbst.
Six nationwide providers were awarded a fixed interest rate of ten years for their offers, and the maximum lead time for the loan is significantly longer than the desired lead time in the ranking. Santander, Commerzbank, Sparda-Bank West, PSD Bank Nürnberg, ING and DEVK received a "very good". Only Commerzbank and Sparda-Bank calculate a forward premium of 0.03 and 0.06 percent respectively. Commerzbank and DEVK charge a surcharge for the five percent special repayment. The effective interest rate per year including the forward surcharge is between 3.52 percent at Sparda-Bank and 3.72 percent at ING. Four of the regional providers received awards: PSD Bank Rhein-Neckar-Saar, Sparda-Bank Hessen, Sparda-Bank Hannover and PSD Bank West.
With fixed interest rates over 20 years, only PSD Bank Nürnberg, as a nationwide provider, received a “very good”. The effective interest rate per year including the forward premium, which is zero, is 3.71 percent. The bank also waives a surcharge for the special repayment. Five regional providers get a "very good": PSD Bank West, PSD Bank Rhein-Ruhr, Sparda-Bank Südwest and PSD Bank Berlin-Brandenburg. The effective interest rate per year including the forward premium is between 3.96 percent and 4.09 percent.
Forward loans are still in demand in year two of the turnaround in interest rates. At Santander, demand is constant, albeit at a lower level than in previous years due to the recent sharp rise in interest rates. Commerzbank speaks of "strong pull-forward effects" in the past year. "Customers have increasingly secured favorable conditions early on," says a spokesman for the bank. "We are currently seeing stable demand."
The forward loan is a financial product that is relatively easy to understand. Nevertheless, consumers should pay attention to a few things. "Furthermore, the financing must fit the personal needs, which differ individually," said the Commerzbank spokesman. "Flexibility in repayment, interest rate security and the right monthly rate play an important role in customer advice." Santander Bank also recommends that its customers carefully calculate the monthly charge. You should take the rising cost of living into account. The new connection rate should fit into the household budget in the long term.
"Follow-up financing is often associated with a higher rate burden than before due to the sharp rise in interest rates," says Sparda expert Syben. "The original repayment amount and the increased interest often lead to a significantly higher rate." Santander recommends considering long fixed interest rates as an option, as they offer security for a longer period of time and initially protect against further interest rate increases. And: When concluding a forward loan, it is advisable to keep an eye out for current promotions at various banks.
Also read: Forward loans – Can this bet protect owners from the interest rate turnaround?