A forward mortgage or Forward Darlehen is a form of follow-up financing. You and the new mortgage lender agree on an interest rate for your new mortgage that starts up to 5,5 years from now. Most banks offer it 5 years in advance. It is as simple as that. It is a unique feature of the German mortgage market that is wonderful for the borrower. It allows you to secure today’s low interest rate years before your existing mortgage fixed interest period ends. This means that by the time your current mortgage fixed interest period ends, you won’t have to worry about a potential increase in interest rates because you already secured a follow-up financing at a low interest rate.
As is the case with other mortgages you can lock in different interest periods. Locking in for over 15-20 years typically becomes very expensive, and is often not necessary as large sums have been repaid already so the interest risk that remains is limited.
In these days, when interest rates are still at a very moderate level, a forward mortgage is especially attractive for mortgage owners with a mortgage, especially of 6-9,5 years old, who will need to secure a follow-up financing in the years to come. Mortgages that are that old were often concluded at high interest rates. Using a forward mortgage you can then lock in today's low rates.
Example: Imagine you have closed a mortgage in 2012 with a 10 year fixed interest period at 4,5%. In 2022 you can refinance your mortgage without penalty. To benefit from today's moderate interest rates and the penalty-free refinancing in 2022, you can use a forward contract for a new mortgage that starts in 2022. Typically you do pay a small premium over current interest rates. But that would still be much lower than the interest rate you are paying now (4,5%). If interest rates stay the same you do not need such a forward contract, but there is a risk that rates increase. Using a forward contract you create future security about your interest payments.