Surge in new Bausparverträge as borrowers save for refurbishment

We wrote back in August in REFIRE 215 about the resurgence of 'Bausparverträge' on the German home financing landscape. The trend towards more of these home savings contracts does look to be accelerating, as more potential German homebuyers face putting their dreams of home ownership on ice for the time being.

Germany's biggest building society, [[Schwäbisch Hall]], has seen a surge in new Bausparverträge, which board chairman [[Reinhard Klein]] said at the beginning of December would likely be up 40% on last year for this full-year.

On the downside, the building society's lending to homebuyers collapsed by 30% in the second half, and will end the year 10% down on 2021's lending, said Klein.

The principle of Bausparverträge is that a big chunk - usually 30% to 50% - of the future figure needed is accumulated through monthly savings. Once the targeted amount has been reached and a minimum savings period has elapsed, the building savings contract is "ready for allocation". The remainder of the sum is then paid out by a building society as a fixed-interest loan.

In Germany, only building and loan associations – [[Bausparkasse]] - are authorised to conduct home savings business. For this purpose, the building and loan association organises the pooling of many different savers into a special-purpose savings association, or [[Zweckspargemeinschaft]].

Previously, people who saved with a home savings contract were deemed “old fashioned” and a formerly popular financial product in Germany seemed to have bitten the dust as it became cheaper to take out a classic mortgage against a backdrop of cheap interest rates. However, that is changing as prospective buyers and homeowners with existing loans who need a follow-up loan now face unexpectedly higher costs. And with people predicting that they will need to save for longer in order to buy their own home, a home savings contract with a building society whereby you save towards your future home every month, is coming back into fashion.

Schwäbisch Hall's Klein said the new trend towards signing a Bausparvertrag was not just based on the higher interest rates payable compared to other forms of property lending; building society loans currently cost about 0.6 to 1.5 percentage points less than a classic real estate loan. People also want to build up more equity capital. This was not just to park the money, he said, but to finance a home later, or, what is currently most in demand, to put money aside for energy-saving refurbishments - which currently makes up two-thirds of Schwäbisch Hall's property lending.

Klein said there is currently hardly any lending for new-build properties, with potential buyers preferring to focus on existing properties. Those who are buying are paying much more attention to the energy aspects of the property. "Where those houses are poorly insulated, buyers are already exerting downward pressure on the price", he said. But with demand for housing remaining high, Klein said he expected prices overall to fall only slightly.

There are 17 building societies in Germany, offering more than 200 different rates. Picking the right one depends on when the money needs to be available from and how much can be saved before then. Models include: purchasing or building a home in four years’ time; customers pay in €40,000 at the beginning and then €300 every month in the interim period. In another model, customers save €400 a month but won’t need the money for eight years. An alternative model finances a property in twelve years’ time. Until then, €250 needs to be saved every month.

This ability to lock in interest rates is one of the key attractions of the Bausparverträge, where customers may not even draw down the money for seven to ten years. So that part of their financing is independent of any fluctuations in interest rates. Hence its appeal to people building their own home, given that mortgage interest rates have been rising rapidly since the beginning of the year, tripling or even quadrupling since then.