Forward mortgage: interest rate hedging for fixed-rate mortgages

The forward mortgage is based on a fixed-rate mortgage, where customers lock in mortgage rates at today's levels months in advance. This can be a new fixed-rate mortgage or an extension of an existing mortgage. It depends on the mortgage provider how long this forward transaction can be planned in advance. With key4, interested parties are granted a lead time of up to 18 months.

Reason for signing up: rising interest rates

The main reason for taking out a forward mortgage is the assumption that interest rates could rise in the coming months. With the assurance of interest rates at today's levels, customers avoid this risk.

Other reasons in favor of the forward mortgage are the individual life situation and the personal attitude to financing. If you can't afford or don't want to take a risk, even if it may seem small, you're on the safe side by taking out this mortgage. Also people who like to put a tick behind open to-do's and so can complete this task at an early stage.

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The cost of a forward mortgage

Mortgage borrowers usually have to pay a premium to the bank – the so-called forward premium – to secure a fixed interest rate. The amount of this depends primarily on how far in the future the mortgage date is – the further, the higher. Many banks offset the premium against the mortgage interest rate, which is then simply somewhat higher than with a mortgage without a premium.

For a relatively small period of time, mortgage lenders offer free protection.

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Take out a forward mortgage or not?

Whether taking out this mortgage is worthwhile can be determined at the earliest when the term has started. Often even later. However, the following fictitious calculation can give you an idea of whether this model is suitable for you.

A customer is interested in a forward mortgage with a term that starts in 12 months. The relatively long duration of an interest rate hedge is paid for by the contractual partner with a forward surcharge of 0.2 percent. The current interest rate therefore increases from 1.3 to 1.5 percent. If the interest rate rises above 1.5 percent at the start and during the term, the transaction will have paid off for the customer. If interest rates remain the same or even fall, the forward conclusion would not have been necessary.

The following is an overview of the advantages and disadvantages of a forward mortgage.

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