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. A forward mortgage allows you to secure the current interest rate up to 18 months before your financing begins. This is useful if you are looking to take out a fixed-rated mortgage soon and expect rising interest rates.

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.

When is the right time for a forward mortgage?

As mentioned, a forward mortgage is worthwhile if interest rates rise in the near future. It allows you to secure the lower interest rates and to make savings compared to the higher interest rates in the future. As interest rates can quickly climb by several basis points in a volatile market, a forward premium (usually just a few basis points) is also manageable if you want to play it safe.

By contrast, a forward mortgage is not worthwhile when interest rates fall or stay the same. In these instances, you would set a premium for your fixed-rate mortgage, which you would then pay unnecessarily every month over the course of the mortgage term. However, if you are a cautious person, a forward mortgage enables you to plan your spending budget at the predefined interest costs.

Generally speaking, interest rate forecasts are always a glimpse into the unknown. Unexpected developments can trigger a rapid rise in interest rates. Anyone keen to make safe, long-term plans can also take out a forward mortgage, regardless of what the interest rates are doing. 

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

Lenders 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. The longer the period between the conclusion of the contract and the payment of the mortgage, the higher the forward surcharge may be.

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 lender can 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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