The state building society LBS Süd in Stuttgart
The abrupt turnaround in interest rates last year, allied with fears about energy efficiency and high heating costs, has led to a boom in German building society savings contracts, or Bausparverträge.
The instrument, the Bausparvertrag, has long been popular in Germany as a slow and steady way of building up equity for house purchases. However, interest in the instrument had waned with the ECB's low interest rate policy making cheap loans widely available. But now, with property loans now much more expensive, and with thousands of potential investors writing off their immediate hopes of being able to buy property, demand has surged as people commit more money to building equity and planning for home improvements.
Bernd Hertweck, chairman, Verband der Privaten Bausparkassen
Bernd Hertweck, the chairman of Germany's Association of Private Building Societies (Verband der Privaten Bausparkassen), recently forecast a jump of both 15% for 2023 of 15% over 2022 - both in new policies and in the volume committed.
In 2022, the private building societies had concluded around 895,000 contracts for a total of about €59.4 billion. This itself represented an increase of 47% over 2021, with the number of new contracts rising by 15%.
While the full-year figures for the year are not yet fully collated, the Landesbausparkassen, the regional grouping of the state savings banks, reported new business in the first nine months of the year at 382,000 new contracts, with a volume of €24.9 billion. The number of contracts was up 7.7%, with the home loan savings volume up 4.4%.
Influence of interest rates
Hertweck, of the private building societies group, who in his day job is the CEO of Wüstenrot Bausparkasse, said the main reasons for the boom in Bausparverträge is the building up of equity along with interest rate hedging, and putting money away for future heating expenditure. The instrument guarantees low-interest loans later, and offers planning security for borrowers, while receiving interest on credit balances.
With the recent slight fall in interest rates, the Sparkassen are expecting a sideways trend in rates in the short term. This should ensure that demand for their home loan and savings plans will remain high, they believe, boosted by demand for loans to finance energy-efficiency renovations.
Axel Guthmann, director, Landesbausparkassen (LBS)
While the more drastic refurbishment plans of the EU have been scaled back, nonetheless, "as heating will become significantly more expensive due to the rising price of CO2, the pressure to make your own four walls fit for energy efficiency is unlikely to diminish," says Axel Guthmann, director of the Landesbausparkassen (LBS), the federal states' saving association.
How does the Bausparvertrag work?
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 – the Bausparkassen - 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, which then underpins the loans.
Market structure
The state building societies account for around a third of the German market, with the rest shared by private institutions. The heartland of the sector is Baden-Württemberg. The four building societies in the south-west account for almost 60% of the market and represent more than 12 million customers. In addition to the industry leader Schwäbisch Hall, the largest German LBS - LBS Süd - as well as Wüstenrot and Deutsche Bausparkasse Badenia have their headquarters there.
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.
Key attractions
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 surged so much since the beginning of 2022.
And the Damocles sword of home energy upgrading hanging over every homeowner, to bring their homes in line with energy goals, is likely to keep the Bausparvertrag business ticking over nicely for years to come.
