Does a Bausparvertrag make sense 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 short: 

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

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

What exactly is a savings contract (Bausparvertrag)?

A Bausparvertrag (BSV) is a savings contract that is linked to a mortgage. 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 may 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 programme. The savings will then be used at a later stage to pay off the mortgage.

This article only deals with the second form.

Financing the immediate purchase with a savings contract

To understand this product it is best to realize that you are in affect dealing with three products: 

  1. An Annuity Mortgage with zero principal repayment. 

  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 of the Savings Contract. Sometimes 1%, 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 so to say 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 0.1%. 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 on 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 or has solutions for it.

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 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 smoke screen. At Hypofriend we devised a method to compare the cost of this product to a normal annuity. This involves complex calculations, and is rarely done: no easily available calculators are available online. We see many examples of reasonable rates, but also very costly effective 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).

  • 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 then envisaged. Which means you end up paying a high rate for insurance you don't use. Also frequently people will want to move to a larger house or a different town or country. 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 in the savings during the savings phase.

  • The complexity of savings contracts puts expats at a particular disadvantage. The terms & conditions of savings contracts are non-transparent and have small print clauses that are 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 that are not easily available.

  • Therefore you need good advice that can turn aspects of the BSV to your advantage.

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 downpayment 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 product that takes into consideration the optimal fixed interest period, downpayment 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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