The forward loan and the termination options are quickly explained. The term forward loan with an advance loan because it is a loan that borrowers use to secure fixed and as low-interest rates as possible for a contractually defined period of time.
The forward loan as follow-up financing
The forward loan is used as follow-up financing to pay off the remaining debt at low interest. To put it simply, the borrower is securing favorable interest rates for tomorrow, i.e. for the future.
The period between the conclusion of the contract and the actual start of the term is called the forward period. During this time, however, the loan is not yet paid out to the borrower. Depending on the individual case, the forward period can be several months to five years.
The great advantage of the forward loan is the high degree of planning security for the borrower because even if the interest level rises in the meantime, the interest rate for the loan remains the same over a long period as agreed in the contract. For this guaranteed interest rate level, the borrower has to pay an interest premium.
However, no loan and commitment interest accrues during the forward period. The forward loan is often used in the area of mortgage lending when the agreed rate fixation for the originally concluded real estate loan expires. In this situation, the borrower needs low-interest follow-up financing, for which the forward loan with a favorable interest agreement is available.
When does it make sense to take out a forward loan?
The point in time at which it makes sense to take out an advance loan depends on the general interest rate level. If the building owner expects the interest rate level to rise sharply within the next five years, it makes sense to take out a forward loan sixty months before the end of the fixed interest rate on the original building loan.
If the interest rate level is consistently low or only moderately rising, it makes sense to wait a little longer until the deal is closed. For borrowers, this type of advance loan is an interesting option for follow-up financing in order to secure a favorable interest rate level for a long period. However, the conditions under which a forward loan can be canceled are just as important. The notice periods and the related conditions depend on the financing phase in which the borrower is currently. It should be borne in mind that a loan, no matter what type, is a legally binding contract between the parties.
The bank or other provider has committed itself as the lender to provide the borrower with a certain amount of money for a certain time on the terms laid down in the loan agreement. The lender has undertaken to make use of the loan over the contractual period and to repay the money made available including interest during the term. According to the German Civil Code (BGB), a contract is a contract that both parties must abide by.
Many a borrower may wonder why a loan contract cannot simply be canceled, because after all the bank gets its money back much sooner than contractually agreed. This idea is not fundamentally wrong, but the bank does not make money from lending the money and getting it back earlier than contractually, but from the interest, it receives from the borrower during the term. If the latter now repay the loan earlier than contractually agreed, the bank as the lender will lose interest income.
This principle also applies to the forward loan as part of follow-up financing. The bank, as the lender, is only obliged to release the borrower from the contract prematurely in one case: if he intends to sell his house. However, the premature termination of the loan agreement is also associated with additional costs for the borrower in this case. He is obliged to pay the bank non-acceptance compensation, which is also referred to as a prepayment penalty.
The borrower takes out the forward loan to protect itself against rising interest rates at the time of the follow-up financing. If mortgage rates fall during this phase, the main purpose of this loan is no longer applicable. The borrower no longer benefits from the contract. The situation is particularly disadvantageous if the mortgage interest rate falls below the interest rate of the forward loan. However, this admittedly annoying situation does not provide sufficient grounds for termination. The builder is obliged to accept the loan and fulfill the contract or to pay a prepayment penalty to the bank.
But why is there any interest on the part of the borrower in early termination of the contract?
Termination of the follow-up financing is possible after the fixed interest period has expired. This can be agreed individually between the contractual partners and can be, for example, 15 or 20 years. According to regular case law, the free early termination of the forward loan is possible after ten years at the latest. According to § 489 BGB, it is a special right of termination at the earliest possible termination date.
Some borrowers are happy about an unexpected blessing, such as an inheritance, and are now interested in terminating the forward loan early to save further interest payments.
However, the intention is often to change the provider because it offers better conditions than the current lender. Some borrowers have borrowed more than they actually used. It is more pleasant to have too much than too little money at the end of the funding period. Even in this situation, however, the bank requires the prepayment penalty because the loan was not used as contractually agreed.
Calculation of prepayment penalty
The amount of this compensation depends on the calculation method. The most common calculation model is the active-passive method. The basis for the calculation is the interest rates for mortgage Pfandbriefe valid at the time the contract was concluded and the associated returns for the same term. The bank compares the lost interest income through the early repayment of the loan with the yield on the mortgage Pfandbriefe. The amount of non-acceptance compensation is calculated from this difference.
The greater the difference, the higher the damages to be paid to the bank. In some cases, the active-active method is also used as the basis for calculation. The bank can theoretically lend the money from the contractually agreed but unused credit to another customer. The amount of the prepayment penalty is calculated on the basis of the interest rate for the unused follow-up financing and the interest rate of current building loans.
The processing fee for redeeming the construction loan incurs additional costs. The banks themselves can determine the amount of these administration fees. This sum is reduced by the risk surcharge for a possible default, which no longer exists when the loan is repaid, and a saving in administrative costs.
Calculation of the notice period
The exact period of notice depends on the type of contract. If the advance loan was taken out as follow-up financing for the current construction loan from one and the same provider, the cut-off date for the notice period is the day the contract is signed, because from this point in time the fixed interest period begins to run. So the judges made a judgment at the district court Bochum (Az. I-1 O 68/15). If the forward loan was concluded with another provider, the key date for calculating the time limit is the day on which the borrower actually took up the loan, with which the interest condition period begins to run.
There are basically only two situations in which borrowers can bypass the prepayment penalty. The legal objection period for all consumer contracts exists within 14 days of the conclusion of the contract. Within this period, borrowers have the right to terminate the concluded credit agreement without giving any reason or for non-payment. Another critical point for credit contract providers is the cancellation policy.
If this was not done when the contract was concluded, incomplete or incorrect, the right to reverse processing exists, even after many years, because the deadline for the reverse processing begins on the day it becomes known. The same principle applies to formal contractual errors if, for example, deadlines are not mentioned or are incorrect. In this case, a new objection period of 14 days begins, since the term of the original period never legally started. This fact also has a positive effect on prepayment penalties already paid. The borrower can request this compensation payment back from the bank as the original contract is reversed.
Conclusion: Pay attention to the conditions
Regardless of whether a follow-up financing is fully exhausted or canceled prematurely, borrowers should not wait to receive an offer from their bank with acceptable terms.
It is better to take action yourself after an offer from the house bank and to obtain counter-offers from various providers. A good alternative to banks is financial service providers who offer loans tailored to their personal situation with acceptable conditions.