Is a Bausparvertrag useful when buying a home in Germany?

In Summary

• A key benefit is the possibility of having a loan with a fixed interest rate until the end at a relatively low cost. In addition, these BSV loans are available to most people, even when normal banks would rather not finance you.

• The risk can be unexpected interest rate exposure if your loan is not well constructed. You also have to be aware of the various costs (in the form of upfront fees and forgone interest earnings). Therefore, good advice is essential.

• If you already have a mortgage, the BSV can be used to cover future interest rate risk. We discuss this in another article.

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 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 account. The savings will then be used at a later stage to pay off the mortgage.

The first option is normally not useful. We don't suggest you use this option as a way to save up to buy a home, as it is very hard to know ahead of time how costly your house is and how high the mortgage will be. You don't have to buy a home. You can always wait.

If you already have a mortgage, it can be beneficial if you are 6–10 years from the end of the fixed interest period, and you are worried about being able to afford higher interest rates. You can use the BSV to reduce the interest risk. Sometimes, people even add it on top of a normal 10-year fixed-interest loan to reduce risk. In these cases, it is flexible: you can save as much as you like. While there are hidden costs, 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 the mortgage each month, 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 until the loan is fully repaid. In other words, You can fix the interest on your mortgage until 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 imply a small mark-up. They can be considered 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 when 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 are quite sure you will stay in your house or apartment for a long time, it may be a good solution. 

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

If the banks are worried about your credit: By financing the loan for the entire period and with a relatively high repayment rate, you signal to the Bausparkasse that you are committed to make it work, and they are comforted that the risk is covered during the entire loan period.  

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. We see many examples of reasonable rates but also very costly effective rates. Our tools allow us to identify 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., a 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.

Why can a savings contract be 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.

The complexity of saving contracts puts expats at a disadvantage if they don't use a good mortgage broker. The terms and conditions of saving contracts are sometimes hard to understand – even in German. 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, it would help if you had 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 have already been saving on 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 is given your financial situation.