Financial savior returns, making it a profitable move once more.
The Desire for a Home Remains Strong: Here's Why Building Savings Contracts are Back in Vogue. By Simone Groeneweg
In Germany, the dream of owning a home continues to be a powerful force, as evidenced by numerous surveys. Many prospective homeowners and builders have successfully moved into their own homes in recent years, thanks in large part to historically low construction interest rates. But those days are behind us now: At the start of the year, a mortgage loan with a ten-year term averaged just 1%, but by October, it had shot up to around 4%. Such interest rate increases not only shake up the real estate financing market but also force consumers to reevaluate their financial plans.
More and more people are turning to a tried-and-true financial product: the classic building savings contract. While cheap construction loans made these contracts seem expensive for a long time, the situation has changed once again: Building savings is making a comeback. Public institutions report an increase in new business in the first few months of the year. Since mid-March, private building societies have seen a rise of over 40% in building savings volume.
In 2021, there were nearly 24 million building savings contracts with a total agreed building savings amount of 908 billion euros. The overall figures for 2022 are not yet available, but the industry is trending upward. "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.
Building Savers: United for the Property
Those who want to prepare financially for a renovation, building, or purchasing a property are increasingly opting for the building savings contract. This savings mechanism has a long history in Germany. Essentially, when people save for a building, they become, in a sense, members of a collective. The shared goal of everyone involved: They want to save together for a property. All contributions go into a single pot. However, the individual saver has their own separate account. When the contract is signed, savers choose their own building savings amount and save a portion of it for the first few years. Once a certain percentage is reached, the contract becomes eligible for allocation. Then, the customer can withdraw the building savings credit and a building loan. The unique aspect of this process: The interest rates during the savings phase are lower than with other savings options. This principle also applies to the loan phase and is particularly advantageous if general interest rates rise during the contract period. "Customers can secure the option of a favorable construction loan for the future and still maintain maximum flexibility," says Mirjam Mohr, Managing Director of the mortgage broker Interhyp.
Thanks to rapidly rising construction interest rates, a combination of a construction loan and a building savings contract can now cost less than a bank loan in some instances.
The State Even Pitches In
In addition to this, there are several advantages that make building savings contracts appealing again. Since 2021, building societies have been authorized to grant a loan of up to 50,000 euros without land registry entry. These loans are primarily used for modernizations, energy-efficient renovations, and senior-friendly conversions. Another plus point: Couples with a taxable income of up to 70,000 euros can receive a housing allowance of 140 euros per year if they save for a building. In addition, there are various state funding initiatives, such as Riester and the employee savings allowance.
The "save first, then repay" principle might seem straightforward, but it's not without complexities. The catch lies in the details. A contract should be tailored to one's personal situation. There are numerous factors to consider, such as when exactly the contract becomes eligible for distribution. Only once it has reached its eligibility, can one withdraw the accumulated credit and the loan. Therefore, this product is often considered to require extensive advice.
Building Savings Contracts Overview
Benefits
- Locked-in interest rates
- State incentives:
- Government bonuses
- VL integration
- Housing allowance
- Structured savings discipline
Risks
- Opportunity cost
- Inflation vulnerability
- Liquidity constraints
- Rate mismatch
Key Considerations
- Contract terms: Compare prepayment penalties, rate adjustment clauses, and eligibility for state subsidies. Verify compatibility with employer-sponsored VL schemes for added contributions.
- Market trends: Track rising yields on government bonds, potential energy efficiency investments, and regulatory updates.
- Regulatory shifts: Monitor updates to the Riester pension reforms and building incentive programs.
Recommendations
- Diversification: Pair building savings contracts with liquid or inflation-protected assets.
- Professional advice: Consult tax advisors to optimize subsidies and employer-matched contributions.
- Monitor policy: Keep an eye on changes to the Riester pension reforms and building incentive programs.
- Recognizing the resurgence of the homebuying dream in Germany, many prospective homeowners and builders are turning to building savings contracts as a tried-and-true financial product.
- Christian Koenig, CEO of the Association of Private Building Societies, reports an increase in new building savings contracts, with the average building savings amount per newly concluded contract significantly boosted to around 70,000 euros in 2021.
- Building savings contracts offer a structured savings mechanism for those preparing to renovate, build, or purchase a property, with the unique advantage of lower interest rates during the savings and loan phases compared to other savings options.
- The state offers incentives for building savings contracts, such as loans of up to 50,000 euros without land registry entry for modernizations, energy-efficient renovations, and senior-friendly conversions, and a housing allowance of 140 euros per year for couples with a taxable income of up to 70,000 euros.
- To maximize the benefits and minimize the risks associated with building savings contracts, it's recommended to understand the contract terms, monitor market trends, and regulatory shifts, consult tax advisors for optimization, and consider diversifying investments with liquid or inflation-protected assets.
