When should subsequent funding prove beneficial?
Follow-up financing for real estate loans presents borrowers with various options to manage their repayment terms and interest rates. Prolongation, rescheduling, and forward loans each offer distinct advantages and disadvantages related to borrower flexibility, cost, and risk management.
Prolongation
Prolongation extends the loan term, reducing monthly repayments, making it easier for borrowers facing temporary cash flow issues to stay current. This option allows the borrower to keep the loan active without triggering default or foreclosure proceedings. However, extending the term increases total interest paid over the life of the loan since payments are spread over a longer period, potentially leading to a higher overall loan cost and prolonged indebtedness.
Rescheduling
Rescheduling modifies loan terms (e.g., extending the term or changing payment schedules) to fit current borrower capacity, potentially avoiding default. This option often includes an option to shorten the term later if financial conditions improve, offering repayment flexibility. However, rescheduling might require affordability checks or credit re-assessment after the initial rescheduling period, increased administrative costs, and possible fees can raise overall costs. Borrowers committing to higher payments after rescheduling must be confident in their financial stability to avoid re-default.
Forward Loan
A forward loan is a new loan agreed upon before the existing one expires; often used to secure financing in advance of needing it. This option locks in financing terms ahead of time, protecting against future interest rate rises and ensuring funds for ongoing or future real estate needs. However, forward loans may require fees such as lock-in fees that might not be refundable if the loan does not close as planned, and if interest rates fall after the forward loan commitment, the borrower may pay a higher rate than current market conditions. Coordination with construction or purchase schedules and lender conditions is also needed.
Comparing Options
The main trade-off is between short-term cash flow relief (prolongation/rescheduling) vs. potential long-term cost increase, and forward loans focus on rate and funding certainty but come with upfront commitments and fees. Comparison portals like Kredit24 have contributed to a trend of switching banks for rescheduling loans, offering various offers from other financial institutions based on key data. Customers can choose the best offer by considering loan term, loan amount, purpose, and selected special conditions.
Prolongation is a convenient method, but customers may miss out on better offers from other financial institutions due to loyalty to their house bank. A final rescheduling is common for follow-up financing to avoid an expensive overdraft facility. The rescheduling loan is a new loan, requiring the submission of all required documents to the new lender and a creditworthiness check. The switch of bank associated with rescheduling does not always pay off, especially with small amounts where the cost-benefit ratio should be carefully considered.
The purpose of a forward loan is to secure current interest rates for the time when the forward loan becomes the follow-up financing. New customer acquisition can lead to benefits for customers, such as the ability to increase the original loan amount. There are three types of follow-up financing: loan for follow-up financing, prolongation, and rescheduling, with a new type called forward loan now available.
Banks may offer better deals to new customers rather than existing ones. Customers can also proactively contact the financial institution for a contract extension. A forward loan is concluded years before the follow-up financing and can be chosen as an extension with the same bank or as a refinancing loan with another bank. Prolongation means extending the contract term of the loan with the same bank. Customers are usually approached by the bank three months before the end of the contract term with a new loan offer.
In summary, the choice between prolongation, rescheduling, and forward loans depends on the borrower's financial situation, repayment capacity, and risk tolerance. It's essential to weigh the advantages and disadvantages of each option and make an informed decision based on individual circumstances.
Personal-finance management plays a crucial role when deciding between prolongation, rescheduling, and forward loans for follow-up financing. Borrowers might miss out on potential cost savings by merely opting for prolongation with their existing lenders, especially if they fail to explore the offers from other financial institutions (other). Comparison portals can help individuals find the optimal rescheduling loan (personal-finance) with terms that best fit their financial conditions and circumstances, potentially resulting in lower costs and better repayment flexibility.
