Is a Bausparvertrag useful when buying a home in Germany?

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Stephan Raczak

Feb 14, 2020
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A “Bausparvertrag” is a type of loan that is still quite popular in Germany and is provided by building societies (“Bausparkassen”). These are complex products that many people (including unfortunately most mortgage advisors) don't understand well. They can be quite beneficial, but also problematic. At Hypofriend, we, therefore, have built special calculators for this product that help us to evaluate with you if the product makes sense for you.

In Summary

  • The risks are large hidden costs (in the form of upfront fees, and forgone interest earnings) and sometimes unexpected interest rate exposure. 

  • The possible benefits are the possibility to fix your interest rate for a long time at a low cost.

What exactly is a savings contract ("Bausparvertrag")?

A "Bausparvertrag" (short: BSV) is a savings contract. It comes in two forms:

  1. In the first and most common form, the savings contract precedes the mortgage. Once you have saved enough, you become eligible for a mortgage loan at a preset interest rate.

  2. In the second form, you immediately obtain a loan, but instead of repaying this loan, you pay into a savings program. The savings will then be used at a later stage to pay off the mortgage.

The first option can be quite beneficial if you are worried about higher interest rates, and you already have a mortgage or you use it in addition to a mortgage. The benefit in that case is that it is flexible. Unlike the second form, you can save as much as you like. While there are hidden cost, these can easily be calculated and evaluated, using our calculator. The rest of this article only deals with the second form.

Financing the immediate purchase with a savings contract

To understand this product, you should realize that you are basically dealing with three products: 

  1. An annuity mortgage with zero principal repayments. 

  2. A savings contract in the same amount. Instead of repaying each month the mortgage, the repayment portion of the monthly rate is used in the first phase towards reaching the savings goal required by the savings contract (30-50%).

  3. A "Bauspar"-loan. Once the savings goal of the savings contract is reached, and you are eligible for pay-out, the savings and a new "Bauspar"-loan are used to pay off the annuity mortgage. This "Bauspar"-loan is in turn repaid at a previously agreed interest rate, till the loan is fully repaid. In other words: You can fix the interest on your mortgage till it is fully paid off.

But, it comes with a number of risks and costs:

  • There are upfront fees for the savings contract. Usually 1,5%, sometimes more. So if you stay in the house for a short period, the BSV does not make sense for you. If you spread these costs over the lifetime of the loan they just imply a small mark-up. They can be seen as a commitment fee to ensure that you have the intent to stay long. Sometimes these fees are paid in cash, sometimes they are rolled into the savings contract and your first savings payments go toward paying off the fees. 

  • The interest that the BSV pays on your savings is very low. Currently, mostly 0,01%. Compared to a standard annuity mortgage, this means you forgo considerable interest earnings. A proper evaluation takes this cost into account in calculating the effective cost of the BSV. So if the overall interest in the BSV is attractive, the BSV may still be a good deal. 

  • You may have an interest rate exposure gap. What do we mean by that? After the fixed interest period of the annuity is over, it may take some time before the BSV pays out, as you may not have saved enough. We refer to this period as the interest gap. The bank will provide follow-up financing to the annuity to bridge the gap, but the interest rate depends on market circumstances at that time and may be significantly higher. A well-designed BSV does not have an interest rate gap.

For whom does the savings contract work

Long stay: If you plan to stay in your house for a long time, then a savings contract may work well. A savings contract provides for a very long fixed interest rate period at reasonable rates. Hence, if you know quite sure you will stay long in your house or apartment, it may be a good solution. 

If you expect modest income growth: In this situation, a full are partial savings contract may help to protect you from the risk of considerably higher interest rates sometime in the future. 

Unlikely to refinance: If you are unlikely to refinance your loan, the savings contract may be a good idea. It is not such a good idea for most people with high-income growth, or who live in areas where houses increase rapidly in value. They typically want to refinance their mortgage at some point. When interest rates are low, they for example may consider buying a larger house or buy a second home either as an investment or as a holiday home or to use the proceedings to diversify their assets. 

General concerns

The complexity of the product can allow the bank or the mortgage broker to create a smokescreen. At Hypofriend, we devised a method to compare the cost of this product to a normal annuity. This involves complex calculations: No easily available calculators are available online. We see many examples of reasonable rates, but also very costly effective rates. Our tools allow us to identify the good rates !

It is not fully guaranteed that the savings contract will be allocated to cover the remaining loan balance after the end of your fixed interest period (e.g. 10-year fixed interest period). There is always a small chance that the Bauspar society does not have enough savings to allocate the loan to everyone, but we know of no recent examples.

You most likely don't want to fix your interest for the full period. Your income grows, and hence most people pay-off their mortgage quicker than envisaged or take money out to buy a second home or they move house. Which means you end up paying a high rate for insurance you don't use. Locking yourself in for 30 years is a very long time!

Why is a savings contract often unsuitable for expats living in Germany?

In general, expats tend to live in Germany for shorter periods. This makes it less likely that they can use the main benefit of a savings contract, namely the long fixed interest period. Also, they are less likely to recoup the high initial closing cost and the implicit cost of low returns to the savings during the savings phase.

The complexity of savings contracts puts expats at a disadvantage if you dotn use a good mortgage broker. The terms and conditions of savings contracts are sometimes hard to understand – even in German. We have seen contracts with broker fees of over 6 percent built-in! Very few brokers are transparent about the actual cost and drawbacks of the product, as it requires complex calculations. We like this numerical complexity as we can figure out for you, if the terms are attractive !

Indeed, you need good advice that can turn aspects of the BSV to your advantage. Do you want to know more? Talk to our experts!

Here is how Hypofriend can help you

If you have received an offer with a savings contract, and you are not sure about the details, Hypofriend can help you evaluate your offer and show you the effective interest cost of that offer.

If you already have been saving into an existing savings contract, Hypofriend can help you use that existing contract as a down payment for a new property purchase.

We can use the BSV intelligently: E.g. if you want to increase your payments over time or create partial certainty about interest rates for a longer horizon. 

Most importantly, Hypofriend can help you find the right German mortgage that takes into consideration the optimal fixed interest period, down payment, and repayment schedule given your financial situation.

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Stephan Raczak

Stephan is one of Hypofriend’s Mortgage Experts.

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