Prepayment Penalty: Information on the Forward Loan
The forward loan is an annuity loan and is often used as part of consumer mortgage lending. As it is an annuity loan, the monthly installment is always constant.
The borrower receives the loan amount only after a certain lead time. The payout date may be 60 months after signing the contract for the forward loan.
The resulting time period is called forward period. During this time, no provisioning money or interest for the borrower arise
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In a nutshell: information about the forward loan for fast readers
- A forward loan is an annuity loan, which will be paid out in the future, but on the terms that will be settled at the time of closing.
- Thus, a period of time arises between the conclusion of the contract and the payment. This is called the forward period.
- The forward period can be up to 60 months in the future and ends with the payment of the loan. The borrower will incur no interest or other fees during this period.
- A forward loan is worthwhile if there are low interest rates at the end of the transaction or long-term interest rates are expected to increase.
- The current interest rate then incurs an additional charge as the provisioning rate for the loan.
- The further the repayment date lies in the future, the higher is this surcharge, since the credit institution has to guarantee the agreed interest rate over a longer and thus more difficult period of calculation.
- If you do not accept the loan, you must pay a non-acceptance fee to the bank, as it causes damage.
- If the loan is terminated prematurely, a prepayment penalty will apply.
What is a forward loan?
A forward loan is a special form of annuity loan. The term “forward” comes from the English and means “forward”. The forward loan is used to secure a certain interest rate for the future at a time. Therefore, it is often used in the context of follow-up financing.
To obtain the interest rate security mentioned above, the borrower must pay an interest premium on the forward loan. It is customary to pay off the forward loan 5 years later. In return, the bank charges a premium on the forward loan. Stiftung Warentest found out in 2015 that, with a ten-year fixed interest rate and a forward period of three years, this interest rate premium averages 0.58 percentage points.
Especially in the context of mortgage lending, a forward loan makes sense. The aim of mortgage lending is to obtain a loan with favorable interest rates wherever possible. These contracts usually have a limited rate of interest. Afterwards, the borrower needs a follow -up financing. However, interest rates may have risen sharply over the course of interest rate fixing. The follow-up financing will be more expensive. With a forward loan, which the consumer has completed well before the end of the loan (1-5 years), he secures the lower interest rates at the time of the conclusion of the contract. So with a forward loan it is possible to avoid unfavorable interest rates. It should be noted that a forward loan must always be used.
A surcharge applies to the current interest rate, as a provisioning rate for the loan. Some banks offer their forward loan without this premium. So it is important to compare the forward loan. Computers on the Internet can help. As a rule, however, a much higher initial interest rate falls on banks that do without the premium.
Forward loans: the terms
The forward loan is intended as follow -up financing or debt rescheduling. The premium on the forward loan is derived from the current repayment, the amount of the residual debt and the borrowing period. With a term of 25 months it amounts to approx. 0.6%. At 36 months approx. 0.9%. In addition, some banks require a minimum loan amount. Ongoing mortgage lending must also end in 12 to 60 months.
Computers on the Internet help with the comparison. In any case, many providers and offers should be spotted to find a suitable loan.
Risks of a forward loan
Usually, the forward loan is concluded to secure the low interest rates for the future. This happens because the borrower assumes that interest rates will rise in the future. If, however, the interest level falls, contrary to the assumption of the borrower, he still has to pay off the loan at the corresponding agreed terms.
If the borrower no longer wishes to have the loan, he must pay a non-acceptance fee.
A non-acceptance compensation is payable when the borrower does not decrease its loan for the mortgage from the bank. The bank then incurs a loss, which it tries to compensate for through this compensation. The non-acceptance fee can be calculated by the bank, but also by financial advisors. It also depends on the negotiated terms. In any case have the non-acceptance compensation calculation checked. In the past, there were always mistakes on the part of the bank here.
A non-acceptance fee is payable if the borrower does not accept the loan. Make sure to check it, because in the past, mistakes often occurred here.
Cancel forward loan
As with any contract, even with a forward loan, it is possible to withdraw from the contract within 14 days. With day 15 you must cancel the contract prematurely, if you want to end it – a revocation is then no longer possible in most cases. As with any other credit agreement, a prepayment penalty will apply. This is a compensation for the bank, as it caused by the early termination of damage. The prepayment penalty can be quite 10% of the loan amount, sometimes even more.
Summary of advantages and disadvantages
It has become clear that a forward loan has some advantages, but also disadvantages.
- secure low interest rates
- favorable follow-up financing
- planning security
- free during the forward period
- Interest rate can not be calculated
- no renegotiation if the interest rate level has fallen rather than increased
- Payment of a surcharge