Advance Loans: Costly interest rate hedging for builders

The low-interest rates for building loans entice many homeowners to secure the favorable level for the future. This can be a costly temptation.

E in average home loan today will cost half as much as a decade ago. Also, the interest rate of the central bank and the government bond yields are at record lows. Given the low-interest rates, it is no wonder that many homeowners dream of securing favorable terms for many years. An instrument of this is forward loans that offer many banks.

In this way, credit conditions have set immediately for loans that are to be paid only up to five years later. Especially tempting offers for borrowers who have completed their contracts several years ago and then pay high-interest rates that the new loans despite the premiums for the long lead time would lower interest payments than the old act. Who has signed a loan agreement average for ten years as in 2007, will pay an annual interest rate of just under 5 percent?

“Forward-loans are a fear product”

Does the contract four years and will then be funded again for ten years, the best banks currently offer for forwarding loans an interest rate of 3.35 percent. At first glance, this seems like a bargain. the borrower compares the interest rate, however, instead of its current exposure to the conditions that are currently being offered for new contracts, the bill looks different. For new mortgages, which account for no more than 60 percent of the home value, interest rates are at 2.3 to 2.6 percent.

Banks can, therefore, pay dearly an early definition of the conditions for the forward loans. “Forward-loans are a fear of product,” says Max Herbst, who runs the FMH financial advice and for many years comparing interest rates of banks. The forward loans become more expensive compared to immediately commencing loans by 0.02 percentage point for each month that they will be completed in advance. So an agreed two years in advance fixed interest rate about 0.5 percentage points, five years about 1.25 percentage points.

At once contracts concluded borrowers are bound, Autumn warns. Who today agreed to pay for a starting five-year loan with a term of ten years, then 3.5 to 4.1 percent, is bound by those terms – even if in five years, the interest during construction for new contracts on the should remain present level or even declined further. Then who wanted to refinance to reduce the interest burden, would have his bank expected such a high early repayment offer that it’s worth it in most cases.

Now many homeowners are risk averse and will accept higher costs when they win for security in their financial planning. For short periods that must not be expensive. Many banks offer for a period of six months free of charge to the early determination of lending rates. Up to twelve months in advance, the spreads on some banks are minimal. But beyond the surcharges be about 0.25 percentage points per year.

The downward movement in interest rates

Who wants to secure conditions for several years before the repayment term, should keep in mind that this has rarely been worth in the past decades. The downward movement in interest rates – since the early nineties, subsidized construction loans average of around 9 to less than 3 percent – was interrupted from time to time by counter-movements. For example, building loans increased in price in 1999 within a few months of 5 to 6.5 percent.

Who then secured a loan for a period of up to two years in advance could save a chunk of money. The contracts were however still longer agreed in advance, then it was worth it in retrospect no longer considered. Real loss transactions, however, the forward loans were in most other phases of the past decades, as interest rates declined continuously. Although a strong rise in interest rates no one can rule for years to come. but he would have to be very sharp to offset the high cost of perennial forward loans.