A forward mortgage is a fixed-rate mortgage where a customer fixes the mortgage interest at today’s rate several months in advance. It may be a new fixed-rate mortgage or an extension to an existing mortgage. The mortgage provider determines how far in advance this forward transaction can be planned. At key4, prospective mortgage borrowers have a lead time of up to 18 months.
Reason for taking out a forward mortgage – rising interest rates
The main reason for taking out a forward mortgage is the expectation that interest rates may rise in the coming months. With an assurance of mortgage interest at today’s rate, customers sidestep this risk completely.
Other reasons for taking out a forward mortgage include individual life circumstances and personal attitudes towards financing. If you can’t afford to take a risk, or simply don’t want to, even a seemingly insignificant one, a forward mortgage is a safe bet. Similarly, people who like to tick items off their to-do lists can complete this task early on.
Forward mortgages – the costs involved
Mortgage borrowers usually have to pay the bank a forward surcharge (Forward-Aufschlag) for the assurance of a fixed interest rate. This amount depends primarily on the future date on which the mortgage will commence – the later the date, the higher the forward surcharge. Many banks offset the surcharge against the mortgage interest, which is then simply marginally higher than for a mortgage without a surcharge.
Mortgage lenders are currently offering free interest rate protection for a relatively short period of time.
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Only when the term starts will you know whether a forward mortgage was in fact worthwhile. Often, you will not know until much later. However, the fictitious sample calculation provided below can help prospective mortgage borrowers understand whether this model is suitable for them.
A customer is interested in taking out a forward mortgage whose term will start in 12 months’ time. The contracting party will pay a forward surcharge of 0.2% for the relatively long duration associated with this interest rate assurance. The current interest rate will therefore increase from 1.3% to 1.5%. If the interest rate increases above 1.5% before your mortgage term begins, and also during the term of your mortgage, this forward transaction will have been worthwhile. If interest rates remain the same or even fall, it would not have been necessary to take out a forward mortgage.
The advantages and disadvantages of a forward mortgage are summarized below.
The customer secures mortgage interest at today’s favorable rate.
The risk associated with a possible rise in interest rates is avoided.
The customer has planning security regarding his or her own life circumstances.
The forward transaction is binding even if the interest rate has not increased.
The customer commits to one provider and their terms and conditions early on, possibly months in advance.
A forward surcharge is payable.
Tax-deductible forward surcharge
Once the mortgage has been taken out, a distinction is no longer made between the forward rate and the interest rate. Instead, it is known as the individual mortgage interest rate (individueller Hypozinssatz). As usual, this can be deducted on a regular basis for tax purposes.
Conclusion: Forward mortgages – a safe bet
Forward mortgages are an option for anyone wishing to minimize their financial risk. They guard against the risk of interest rates rising before your mortgage term begins, and also during the term of your mortgage. However, a premium known as the forward surcharge must be offset for obtaining this security. Only at a later date will it be possible to ascertain whether this forward mortgage was ultimately worthwhile.
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