German Mortgage Glossary

Housing-and-Savings-Contract

(Bausparvertrag)

A „housing-and-savings-contract“ is a contract which combines a savings agreement with a real estate loan. The contract consists of two parts - a savings plan and a real estate loan. The interest rate on the savings is fixed, while the interest rate for the possible subsequent loan is also already fixed. The agreement stipulates the monthly savings contribution and the duration. If certain conditions (minimum term, minimum credits,..) are fulfilled, the contract is "ready for assignment". Then you have 3 options you can choose:

1. You use it only for saving credits and waive the loan.
2. You accept the loan and combine it with your mortgage lending.
3. You stay flexible and let the contract continue and decide later on the usage as needed.

The loan is tied to residential purposes (e.g. for a house purchase or for a new kitchen). Exception: when the contract is concluded before the age of 25, both savings and loans can be freely used for any purpose.

The problem with the Bausparvertrag is that you cannot determine a priori when it is the best time to buy a house, and how much money you need, and how big a house you like to buy. In other words: when concluding the Bausspavertrag you already need to have a clear idea about the future including what happens with house prices. This is not very realistic. House prices can eg increase rapidly, making your savings fall short, and making you want to buy a house earlier. There is often a random element involved in the moment you can use the loan--a lottery aspect. Finally, these contracts tend to have high fixed costs.