Safe Savings Returns, Making It Worthwhile Once More.
Going Back to Traditional Home Financing Amid Rising Interest Rates: A Closer Look at Building Savings Contracts
By Simone Groeneweg
There's a renewed interest among Germans in owning a home, and that's evident in surveys. With low construction interest rates paving the way for many homeowners and builders in recent years, the scenario has evolved for now—interest rates are on the rise. Just consider the leap from an average 1% mortgage loan with a ten-year term in January to 4% in October. Such a hike is bound to make consumers reevaluate their financial plans.
Faced with increasing interest rates, many are swearing by an old standby: the classic building savings contract. Following a period in which cheap construction loans made these contracts seem expensive, they're making a comeback. Official figures indicate a 40% increase in building savings volume since mid-March, while public institutions reporting a booming new business in 2022.
In 2021 alone, Germany boasted nearly 24 million building savings contracts with a total agreed building savings amount of 908 billion euros. As industry figures for 2022 haven't been released yet, it's safe to say the sector is on the rise. "The average building savings amount per newly concluded contract has seen a significant boost. It is currently around 70,000 euros," reports Christian Koenig, CEO of the Association of Private Building Societies.
Collaborative Homeownership: The Power in Numbers
For those who want to finance the renovation, construction, or purchase of a property, building savings contracts are becoming increasingly appealing once again. This savings form has a rich history in Germany. Savers who opt for building savings essentially join a collective. All contributions pool together, but each saver maintains their individual account. When concluding the contract, the saver specifies a building savings amount and saves a portion of it themselves in the first years. Once a certain percentage is reached, the contract becomes eligible for allocation. The customer can then withdraw their building savings credit and secure a building loan. The key aspect of this process is that the interest rates during the savings phase are typically lower than with other savings options. This can be especially beneficial if general interest rates increase during the contract period. "Customers can secure a favorable construction loan in the future and maintain maximum flexibility," says Mirjam Mohr, board member for private customers at Interhyp, a mortgage broker.
Comparisons suggest that a combination of a construction loan and a building savings contract may currently be cheaper than a bank loan.
State Support and Additional Advantages
Beyond the attractive interest rates, building savings contracts offer other advantages. For example, building societies have been permitted to grant blank loans of up to 50,000 euros without land registry entry since 2021. These loans are primarily used for modernizations, energy-efficient renovations, and senior-friendly conversions. An added advantage: couples with taxable income of up to 70,000 euros can receive 140 euros in housing allowance per year by saving for a building. Additionally, there are other state subsidies such as Riester or the employee savings allowance.
While the basic concept of "save first, then repay" may sound simple, it's important to consider the details before taking out a contract. Customers should tailor contracts to their personal situation, considering aspects like when the contract becomes eligible for distribution—which only happens once it has reached its eligibility level, allowing one to withdraw their saved credit and the loan. This product is considered to require extensive advice.
The Fine Print: Key Decision Points
- Interest Rate Structure: Calculated based on the average credit interest rate across the savings phase, with a fixed addition. Some contracts may offer reduced rates, but forfeit these if terminated within 7 years or pre-financed.
- Contract Terms and Penalties: Long-term commitment typically required (7–15 years) to qualify for benefits. Early termination may result in loss of preferential rates or penalties. Subscribed capital must match property size (e.g., €28k–€140k depending on household size).
- Tax and Financial Flexibility: Tax-advantaged tariffs available, but must align with German rental property rules. Hybrid financing options enables liquidity, though pre-financing may void special rates.
- Demographic and Usage: Age-based incentives (youth bonuses) for savers under 25 and larger households needing higher subscribed capital (e.g., €112k for 4-person households).
- Market Context: Recent fiscal easing may ease pressure on property markets, but will not directly lower interest rates. Consider rate hikes and ensure repayments remain feasible if incomes stagnate.
Recommendations
- Compare hybrid models: Use a building savings contract for rate security but pair it with short-term financing for immediate needs.
- Prioritize flexibility: Opt for contracts allowing partial withdrawals or adjustments to subscribed capital without penalties.
- Monitor fiscal policy: Leverage debt brake reforms for public-sector rental demand in cities like Hamburg and Berlin.
- In light of rising interest rates, many Germans are relying on building savings contracts, an old method that has seen a 40% increase in volume since mid-March and is projected to grow further in 2022.
- The average building savings amount per new contract has significantly increased, currently standing at around 70,000 euros, as reported by Christian Koenig, CEO of the Association of Private Building Societies.
- For those looking to finance the renovation, construction, or purchase of a property, building savings contracts are once again becoming an attractive savings form, offering lower interest rates during the savings phase compared to other options.
- Collaborative homeownership through building savings contracts allows savers to pool their resources, maintaining their individual accounts while benefiting from state support such as housing allowances and other subsidies like Riester and the employee savings allowance.
- When considering a building savings contract, it's crucial to be aware of the interest rate structure, contract terms and penalties, tax and financial flexibility, demographic and usage considerations, and market context to make an informed decision.
