How a "Bausparvertrag" can help you avoid high interest rates for refinancing
The key points
Does a Bausparvertrag make sense for you?
In Germany, you have a special instrument to reduce the risk that your interest rate jumps in the future that is called a Bausparvertrag or BSV. At the moment this instrument is very attractive if you need to refinance in 6-10 years. The reason is that future rates have jumped up, but the rates on the Bausparvertrag have not. They are likely to change by January 1st, 2023, so you have a limited window to act to get the best deal.
A BSV allows you to lock in a very low future interest rate. Indeed borrowing at 1,25 % or 1,5 %, 6-10 years down the road is very attractive in light of current high mortgage rates. It almost sounds too good to be true. Therefore we have created a tool where we can evaluate precisely if and how it makes sense.
How does a Bausparvertrag work to reduce interest risk
You can use the Bausparvertrag (BSV) to save a minimum amount each month till the end of the fixed interest period on your mortgage. Then when the time of the interest reset arrives the Bauspar company grants you a loan at a low fixed interest rate till you have paid off that loan. That loan is typically 1 to 1 ½ times larger than the amount you saved up. This means you reduce your mortgage by your savings in the build-up phase ("Ansparphase" in German) and by the repayments in the payments phase.
Whether this is attractive depends on how quick you need to repay your loan. If that is very rapid then you do not benefit much from the low fixed interest rate. We have therefore focussed on finding you a product with a long repayment period.
You do need to be aware that the money in your savings account pays you very little interest. In addition, you have to pay a fee of about 1,5 % for the product. Therefore if you pay a rather high interest rate on your loan, it is somewhat less attractive to take a BSV, but not much. In the table below, you see at what expected interest rate makes sense to conduct a Bausparvertrag, and how much you would stand to gain for every 100 € per month you pay into such a product if the future interest rate is 3% respectively 4 % and 5 %.
For each 100 €, you would save up about 9.000 € till the end of the fixed interest period and then in total reduce your mortgage interest risk by 20.000 €, by having a low interest rate loan for the next 9 years, which you repay at about 100 € per month. Overall we calculate that with current interest rates on mortgages of about 4 % for refinancing with a good loan-to-value ratio, your return on investment of a BSV is about 4%. This is rather attractive compared to putting your money in the bank. If you want to discuss how much is advisable for you, and what product is best, our brokers have access to a special Hypofriend-built tool to evaluate your alternatives.
Keep in mind that a key benefit is the flexibility of the product for this purpose. You can decide on the amount you are willing to save and even during the build-up phase you have the flexibility to add to the savings or pay in less. For many people, it makes sense to target at least a specific amount like the repayment for their KFW loan or have a round number in mind to help keep you on track with your savings and expenditure planning.
An even better alternative: a private pension plan?
It may not sound intuitive at first sight, but paying into a private pension plan (PPP) is also a great option and in quite a few cases even better. You can use a PPP to invest in a tax-efficient way in ETFs, and then use the build-up sum to reduce your mortgage balance if the interest rate on the mortgage is high and otherwise just let it run, and then you use the proceeds for your pension or for example to buy a second home.
With a private pension plan from Pensionfriend, you also have flexibility as you dont pay any up-front fees. You can augment or reduce your contributions (except for a minimum monthly payment of 50 €).
Especially when interest rates turn out to be low, and you have a long period till the end of the fixed interest period, a private pension plan is by far the most attractive alternative. In table 2 we show you the outcomes for different possible scenarios. You can see that especially with a long fixed interest rate period (and hence a long period of for example 14 years till your refinancing need), the PPP is very attractive, and also if annual returns are high. In the outcome, we assume that the cost of a Pensionfriend Pension Plan is deducted.
Don’t save your questions. We’ve got answers.
Can I pay less into my BSV when it does not suit me? What happens then?
Yes, with a Bausparvertrag you are flexible in the savings phase. You can do less payments or stop paying. Your Bauspar loan will then be less. If you save more it will not help unless you choose a total contract that has some space for higher payments. The provider of the Bauspar contract will examine if you made your average payments on time in determining if you are eligible for the full amount of the loan in the contract.
Please be aware, that if you reach the savings target later, or if you do not reach your target you cannot get the same loan amount (or you get it later). If you still want the same loan amount, the Bauspar societies are offering you the option to take a bridge loan from the end of the refinancing to the pay-out.
Does this mean a BSV is a good idea if I buy a new property?
Not necessarily. A BSV for a refinance does not force you to stick to a high repayment plan. But a BSV that you use to fully finance a new property does require you to save the necessary amount in time, otherwise, your refinance loan is jeopardized. A BSV for a new property is also differently priced as you need a much longer savings phase in order to keep your payments at a reasonable level. Likewise, the repayment phase is much longer. Therefore interest rates are much higher. The product we have summarised in the main article is especially attractive. We have recommended clients in the past to include such an extra BSV already when purchasing a home when the 10-year fixed rate mortgage was their preference as a way to at least partially ensure a low rate after 10 years. You can still do this if you for example expect your income to grow or you expect bonuses that you could save through a BSV.
What about alternatives like a Forward Darlehen?
A Forward Darlehen locks in the future rate at the current interest rate plus a fee. It is a good option when the fixation period ends in the next 3 years (a few banks offer also up to 5 years earlier) With this Forward Darlehen you can fix the interest rate already today for the remaining loan balance at the end of fixation. So if you expect higher interest rates than we have them today, you can secure yourself against that risk of a higher rate. Please be aware that the interest rate is slightly higher than the current offers. This Surcharge is usually around 0,01 %-0,02 % per month on top of the current interest rate. So if your fixation period for example ends in 12 months your interest rate is 0,24 % higher.
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