By Sara Seddon Kilbinger, Senior Reporter, REFIRE
As prices and interest rates rise, could this old-fashioned savings method be back on the menu?
Bausparverträge, or home savings contracts, feel as if they belong to an antiquated past but with interest rates for ten-year mortgages rising to as high as 3.4% since the beginning of the year, would-be homebuyers are having to put their dreams on ice. Are Bausparverträge now making a comeback?
The principle of Bausparverträge is that a big chunk - usually 30% to 50% - of the future figure needed is accumulated through monthly savings. Once the targeted amount has been reached and a minimum savings period has elapsed, the building savings contract is "ready for allocation". The remainder of the sum is then paid out by a building society as a fixed-interest loan.
In Germany, only building and loan associations – Bausparkassen - are authorised to conduct home savings business. For this purpose, the building and loan association organises the pooling of many different savers into a special-purpose savings association, or Zweckspargemeinschaft.
Previously, people who saved with a home savings contract were deemed “old fashioned” and a formerly popular financial product in German seemed to have bitten the dust as it became cheaper to take out a classic mortgage against a backdrop of cheap interest rates. However, that is changing as prospective buyers and homeowners with existing loans who need a follow-up loan now face unexpectedly higher costs. And with people predicting that they will need to save for longer in order to buy their own home, a home savings contract with a building society whereby you save towards your future home every month, is coming back into fashion.
“Intensified demand” in recent weeks
Interhyp AG, a mediator of private building financings, has reported “intensified demand” for building savings loans in recent weeks. Stuttgart-based building society LBS has also reported an increase of around 36% in the number of home savings contracts in the first half of the year. LBS CEO Stefan Siebert is expecting new business of around €11 billion this year. In the first half of the year, their customers signed home loan and savings contracts totalling €6.23 billion. Siebert acknowledged that rising prices and interest rates have contributed to the growth: ‘Maybe the new home will be smaller, a little older or located further out of town in a more favourable region,’ he said.
Nonetheless, the market can be opaque to navigate. There are around 17 building societies in Germany offering more than 200 different rates, including Schwäbisch-Hall and BHW. Picking the right one depends on when the money needs to be available from and how much can be saved before then. Models include: purchasing or building a home in four years’ time; customers pay in €40,000 at the beginning and then €300 every month in the interim period. In another model, customers save €400 a month but won’t need the money for eight years. An alternative model finances a property in twelve years’ time. Until then, €250 needs to be saved every month.
Moreover, home loan and savings customers are in a "closed system". In principle, only funds that have previously been paid in by other savers are disbursed as loans, meaning that the allocation of the loan is not guaranteed.
Interest rates have tripled since the beginning of the year
Depending on the tariff, building savings loans currently cost about 0.6 to 1.5 percentage points less than a classic real estate loan. Since the beginning of the year, interest rates for mortgage loans have tripled. Instead of less than 1%, homebuyers were paying around 3% interest per year for a bank loan with a ten-year term at the end of July 2022.
There are no such jumps in interest rates at the building societies. Currently, they typically charge 1.5% to 2.5% interest – the same as last year. However, there are other disadvantages to Bausparverträge, namely high fees and low interest rates during the savings phase. Irrespective of the term and debit interest rate, the additional costs are a major factor. These include the acquisition fee due at the beginning, which typically amounts to between 1% and 1.6% of the home savings sum and is deducted from the initial savings deposits as a commission.
On the plus side, interest rates today can be locked in, even if customers do not draw down the money for seven or ten years. This means that this part of the financing is independent of any fluctuations in interest rates. As such, it could also appeal to people building their own home, given that construction interest rates have been rising rapidly since the beginning of the year. The interest for ten-year standard credits is around 2.8%, according to financial consultancy FMH. Five months ago, the comparative interest rate was still 0.9%.
