Guide — Refinancing
When the rate premium pays off.
Locking in today's rates for a refinancing that only starts years from now — the idea is clear, the arithmetic less so.
Forward loans are not a bad idea — they are just rarely the right one. A sober look at when the premium actually makes sense.
What a forward loan is
A forward loan is a refinancing arrangement that you sign today but that only starts in 6 to 60 months — typically when the fixed-interest period of your existing loan comes to an end. The borrowing rate is fixed today. In return, the bank charges a premium for every month of lead time.
The purpose is obvious: you protect yourself against rising rates. If rates do rise, you save interest over the follow-on term. If they do not, you have paid for insurance that was never needed.
The arithmetic — simplified
Put simply: you pay the premium (e.g. 0.5 percentage points over a 10-year follow-on term) but gain nothing if rates stay flat. If rates rise by 1 percentage point, the forward loan was the right call. If they do not rise, or fall, it was expensive insurance.
The economic logic behind it is not “a cheaper rate today” — because of the premium, today's rate is already above the market rate. It is a bet that rates will rise more sharply over the coming years than the bank has priced into its premium.
When a forward loan makes sense
Three situations in which we recommend a forward loan more often:
- A lead time of 18 to 48 months, with a clear expectation of a moderate rise in rates over that period (e.g. due to ongoing central-bank decisions).
- Owners with a strong need for security who value planning certainty more highly than the chance of better terms.
- A very high remaining debt, where even small rate changes translate into noticeable differences in the monthly payment.
When a forward loan is not the right tool
The reverse is just as important. You should avoid a forward loan if:
- the lead time is under 12 months — the premium rarely justifies the risk.
- the rate environment is clearly trending downwards — betting on rising rates when every indicator points down means buying bad insurance.
- you are planning to sell or substantially alter the property in the next few years anyway. Forward contracts are not trivial to unwind.
- you already hold a building-society savings contract that provides rate certainty — in that case a forward loan is often a second insurance policy against the same risk.
What you should not be told
If someone tells you a forward loan is “particularly attractive right now” because rates happen to be low — please pause. The premium is market-dependent and always priced into today's terms. What matters is not the absolute level, but the difference between today's rate plus the premium and the rate that will actually apply in two or three years' time.
A serious recommendation on forward loans never starts with “it always pays off”, but with “let's work through your remaining debt, your lead time and the rate outlook together”.
Frequently asked
Five questions that come up again and again in our consultations.
- What does a forward loan cost?
- Banks charge a rate premium for every month of lead time — typically between 0.01 and 0.03 percentage points per month. With a 36-month lead time you therefore end up with a premium of 0.36 to 1.08 percentage points on top of today's market rate. The exact amount depends on the bank, the interest-rate environment and the term.
- How far in advance can I sign?
- Lead times of 6 to 60 months are common. Some banks go up to 66 months, while some savings banks only offer up to 36 months. The longer the lead time, the higher the premium — and the less certain the forecast that rates will actually move upwards.
- Can I cancel the contract if rates fall?
- No — and that is the crucial point. Once you sign a forward loan, you are committed. If rates fall against expectations, you still pay the agreed premium plus the fixed borrowing rate. A forward loan is not an option — it is a binding contract.
- Is a forward loan worthwhile with a short lead time?
- Rarely. With less than 12 months of lead time, the premium is often so small that it barely pays off economically — on the other hand, the interest-rate risk over such a short period is equally manageable. We typically recommend forward loans only from 18 to 24 months of lead time, and even then only if rates are clearly expected to rise.
- Does a forward loan make sense when rates are stable?
- No — in a flat or falling rate environment, a forward loan is insurance against a risk that is not actually acute. If you still want planning certainty, you can look at a building-society loan or a longer fixed-interest period on your current financing. A forward loan is a tool for clearly anticipated rate rises, not an all-purpose remedy.
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