Forward Loans Offer Stable Rates with Waiting Period

The financial sector in Germany has seen a growing interest in forward loans, which are agreed upon contractually but not disbursed until the end of a borrower's current fixed-rate period. This article delves into the specifics of forward loans, including the absence of commitment fees, the cost of the waiting period, and the obligations associated with these loans.

Forward loans are a contractual agreement made today, but the funds are not disbursed until the borrower's current fixed-rate period ends. Lead times of about twelve to sixty months are common, though some banks offer longer terms. The bank refers to the cost of the waiting period as a "forward premium," which is usually calculated per month of the lead time and added as a fixed amount to the loan interest rate. This premium applies to the entire new fixed-rate period and not just to the months leading up to disbursement.

For consumer loans, the 14-day right of withdrawal applies, meaning that if the borrower does not draw down the funds within this period, they must pay a penalty. The amount of this penalty depends on the loan amount, the fixed-rate period, and the difference between the agreed-upon interest rate and the prevailing market rate at that time. In some cases, the premium for the first six to twelve months of the lead time is waived by many banks.

The waiting period for forward loans is a significant factor that borrowers must consider. The yield curve's direction can also affect the premium. When the yield curve is rising steeply, the premium is significantly higher. Conversely, when the yield curve is flat or inverted, the premium can be very small or even eliminated entirely. Always ask the bank to show you the premium as the difference from the interest rate without the lead time.

By signing an agreement for a forward loan, the borrower is obligated to draw down the funds on the agreed-upon date. If interest rates fall by then, the borrower is still bound by the agreed-upon interest rate. If the borrower does not draw down the funds, they must pay a penalty for non-drawdown. The amount of this penalty depends on the loan amount, the fixed-rate period, and the difference between the agreed-upon interest rate and the prevailing market rate at that time.

The right of termination under Section 489(1)(2) of the German Civil Code (BGB) takes effect ten years after full disbursement, with six months' notice and without compensation. For a forward loan, the disbursement date applies, not the date of signature. If there is a long lead time, this deadline is correspondingly later.

FinanzPlusImmo, headquartered in Neuwied and operating throughout Germany, provides guidance on forward loans. The company's owner, Enis Recica, emphasizes that forward loans are often taken out for peace of mind, as they offer a stable interest rate during a period of rising interest rates. Recica advises clients to run the numbers both ways and determine at what point someone would trade the interest rate advantage for security.

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In summary, forward loans offer borrowers a stable interest rate during a period of rising interest rates, but they come with a waiting period and associated costs. The right of termination under Section 489(1)(2) of the German Civil Code (BGB) takes effect ten years after full disbursement, with six months' notice and without compensation. FinanzPlusImmo, headquartered in Neuwied, provides guidance on forward loans and compares offers from over 400 banks.