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Created on 22.02.2023

Forward mortgage: how to protect yourself against increasing mortgage interest rates

Are you looking for a financing solution for your house or apartment because your mortgage is expiring or you want to buy a home? With a forward mortgage, you take out a fixed-rate mortgage that you will only need in the future at today’s interest rates. Find out in this article how a forward mortgage works and what its advantages and disadvantages are.

For many homeowners, rising interest rates are a new phenomenon because for a long time mortgage rates have only shown a downwards trend. This means that for future homeowners or holders of an expiring mortgage, the question arises as to how best to finance their homes when faced with an upward trend in mortgage interest rates. A forward mortgage is one possible option.

What is a forward mortgage?

A forward mortgage is a fixed-rate mortgage that allows you, as a homeowner, to hedge against rising interest rates. It allows you to take out a fixed-rate mortgage at today’s mortgage rates, even though the financing will not start until a later date. You should consider a forward mortgage if you are paying off a mortgage several months in advance or are looking for an early financing solution for your new home.

Which market forecasts make forward mortgages a worthwhile option?

Whenever forecasts indicate rising mortgage rates. Whether a forward mortgage was worthwhile can only be assessed at a later date.

What do you need to know about forward mortgages in terms of costs?

Banks charge a forward surcharge for interest rate hedging using a forward mortgage. The hedging costs depend in particular on the term of the fixed-rate mortgage and the period during which the interest is to be hedged. As a rule, the longer the period between the conclusion of the contract and the payment of the mortgage, the higher the forward surcharge.

What are the advantages of a forward mortgage?

  • Thanks to the fixed interest rate, you have certainty about the future costs of the mortgage and can budget accordingly. This gives you planning security.
  • A forward mortgage provides protection against rising interest rates for the term of the mortgage, allowing you to minimize your financial risk.

What are the disadvantages of a forward mortgage?

  • A forward mortgage is binding even if mortgage rates fall. You commit to the conditions and the provider in advance.
  • The bank charges a surcharge for the assurance of a fixed interest rate using a forward mortgage.

What is the main reason for taking out a forward mortgage?

The main reason is the assumption that mortgage rates will rise. By fixing the mortgage interest rate early, customers avoid the risk of having to pay higher interest rates in the future. With a forward mortgage, homeowners choose to stay on the safe side financially.

What happens if mortgage rates go up or down during the term of a forward mortgage?

Because a forward mortgage is linked to a predefined, uniform interest rate over the entire term, neither falling nor rising mortgage rates have any effect on the mortgage.

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