German Bausparvertrag Explained
Many expats living in Germany get a Bausparvertrag without understanding what it really is. Is a Bausparvertrag a good option to save for a future real estate purchase? 🤔
Introduction: How A Bausparvertrag Works
Saving for real estate with a German Bausparvertrag has a long tradition in Germany that started back in the 19th century. As the idea to save money together through a collective with the aim of financing housing measures worked very well in the past, a lot of Germans started Bausparen. According to official statistics, there are 18 different Bausparkassen (companies issuing a German Bausparvertrag) that have sold over 23,8 million Bausparverträge in Germany worth over 908 million Euro.
As the Bauspar community saves together towards a common goal, everyone can achieve their goal of buying real estate faster than if everyone would save money individually. Imagine that you can save 10.000€/year and are looking to buy a property worth 100.000€. Without any bank or Bausparvertrag, it would take you 10 years until you can finally buy your dream home (renting vs buying). If you would find 9 other people with the same goal and savings power in mind, the community could afford a property already in year 1. Thanks to Bausparen, everyone can afford a property on average after 5 years instead of saving themselves for 10 years.
Even though the strategic idea of a Bausparvertrag is very good and worked well in the past, there are some serious concerns about why Bausparen might not be the most efficient way to save equity for a property. With rising real estate prices in Germany and interest rates that have been at 0% for over 6 years now, a Bausparvertrag does not keep his historic promise of making real estate affordable for the saver anymore.
This article will go into the very detail on the ins and outs of a German Bausparvertrag so you can figure out if this is the right financial product for you to save for your future real estate dream. Hopefully, we can bring some transparency into Bausparen before you sign up for it without understanding how a Bausparvertrag really works. And if you signed up for a Bausparvertrag already, this article will hopefully help you to determine what you should do with it.
3 Phases of a German Bausparvertrag
There are various Bausparkassen in Germany offering many different variations of Bausparen. Independent of the details of any given Bausparvertrag, all work the same way and can be strategically divided into 3 phases:
Savings phase 1: Earlier in this article, we determined that the overall goal of the Bauspar community is to make real estate purchases more affordable for everyone in the community. That is also why people joining the Bauspar community have to start saving money first in phase 1 of their Bausparvertrag. It would be rather unfair towards your Bauspar community to buy a property with their savings without contributing anything, right? 🤔
That is why you will have to contribute usually 0,4% of your Bausparsumme (value of your Bausparvertrag) every month in order to contribute a fair amount of money towards your Bauspar community. During this savings phase 1 of your Bausparvertrag your contributions will usually return anything from 0% to 2% interest depending on your exact Bausparvertrag.
Allocation phase 2: After saving about 30% to 50% of your Bausparsumme (depending on your exact Bausparvertrag again), you will reach the allocation phase in which you may be allowed to ask for your Bausparloan. As getting your Bausparloan is dependent on many other factors than just your contributions to the Bauspar community (e.g. your Schufa score, other people in the community requesting their Bausparloan, etc.), there is no guarantee that you will get your money once you request it.
As there is no guarantee that you will get your Bausparloan once you are in the allocation phase 2 of your Bausparvertrag, there are other ways as well to get your money. Unfortunately, they might cost you some pretty hefty penalties and can take up to 6 months until you really get your money. In case you do not request your Bausparloan once you reach allocation phase 2, your Bauspar provider might reward you with bonus interest on your savings. Your Bausparkasse can also cancel your Bausparvertrag if they do not want to pay you bonus interest.
Bausparloan phase 3: Once your Bausparkasse approves your allocation, you are eligible to receive your Bausparloan and finally buy your dream property you always wanted to have. During this phase, savings of other people in your Bauspar community that are still in phase 1 or phase 2 are paid out to you like a loan that you have to pay back to your community in the form of principal and fixed interest.
When saving 0,4% of your Bausparsumme per month, it would take you 6,25 years until you could reach allocation phase 2 with 30%, or almost 10,5 years until you saved 50% of your Bausparvertrag. Once your Bausparloan is approved, your principal and interest payment usually amounts to twice as much as you saved before. When saving with 0,4% of your Bausparsumme, you would have to pay 0,8% of your Bausparsumme in loan phase 3 until your Bausparloan is paid back in full.
Benefits of a Bausparvertrag in Germany
Given the fact that you know almost all relevant numbers (e.g. interest in savings phase 1 & in loan phase 3) of your Bausparvertrag in advance, you will get a lot of security in your financial planning. You will know your exact monthly rates throughout the whole lifetime of your Bausparvertrag once you sign the contract. That is a major benefit compared to a regular real estate loan that fixes interest for usually 10 – 15 years while the entire loan is calculated to be paid back in full in 35 – 40 years.
Bausparen can also secure you various government benefits:
- Wohnungsbauprämie is a bonus from Finanzamt that will be paid to singles with a taxable income (not gross salary) of up to 35.000€/year or up to 70.000€/year for married couples. Bonus can be 70€/year for singles or 140€/year for married couples.
- Arbeitnehmer-Sparzulage is another bonus that you can secure with the capital-forming benefits (“Vermögenswirksame Leistungen“) that you might get from your employer.
- When saving for retirement with a Riester pension level 2, you can also get your annual government bonuses of 175€ for adults or 300€ for kids paid into your Bausparvertrag to pay off your Bausparloan faster (“Wohn-Riester“).
While a traditional real estate loan offers generally speaking a maximum additional repayment of 5% principal per year (“Sondertilgung“), you can pay off any amount of your Bausparloan without any penalties. By doing this, you can significantly reduce the time until your Bausparloan is paid back in full all while saving some interest along the way as well.
Downsides of a Bausparvertrag in Germany
As the German “bau” in Bausparen translates to “build” a Bausparvertrag is meant to be used for residential purposes only. The product was introduced so the Bauspar community can buy properties with it, renovate properties with it, or pay off other existing real estate loans. You can save money in Bauspar phase 1 and reach the allocation phase 2 without having a residential goal in mind, getting your loan in Bauspar loan phase 3 works only for real estate purposes.
Consequently, a Bausparvertrag severely lacks the flexibility that is so important for many expats living the typical expat lifestyle. First, your Bausparvertrag is meant to be used for specific residential purposes only, second, you cannot know in advance how soon you can transition from Bauspar phase 2 to Bauspar phase 3. Remember in the introduction that the Bauspar community cannot function if everybody wants to buy a property at the same time. You may have found your dream property but your Bauspar provider does not allow you to enter the loan phase 3 of your Bausparvertrag.
Very similar to German pensions, you are not getting the benefits of a Bausparvertrag completely for free. A Bausparkasse charges usually 1% of your Bausparsumme in fees to set up your Bausparvertrag as well as other miscellaneous fees to keep your Bausparvertrag running. While paying fees is part of buying real estate (e.g. taxes, notary, agent), the significant difference between a property and a Bausparvertrag is that the interest rate of a Bausparvertrag is usually close to 0%. Paying high fees for little return is generally speaking a money-losing combination.
Conclusion: Should You Get A German Bausparvertrag?
Given the advantages and the disadvantages of a German Bausparvertrag, we can clearly see that it is not a wonderful financial product like German banks or Bauspar salesmen try to make you believe. There are a lot more efficient ways to save equity for a future real estate purchase that also reward you with a higher return on your investment.
Generally speaking, a Bausparvertrag is good in one case and this specific case only: If you are absolutely sure that you would like to buy a home in Germany and believe that interest rates on real estate loans will rise tremendously in the future. Real estate loan rates of around 2% – 3% as of mid-2022 are almost enough to justify a Bausparvertrag. If you think interest rates will go up to 4% or 5% Bausparen becomes even more profitable. You can compare different Bausparverträge here or reach out to us so we can help you select the best Bausparvertrag for your personal situation.
If you decide to get a Bausparvertrag for yourself, rather get a small one with ±25.000€ Bausparsumme instead of a large one with +100.000€ Bausparsumme. Remember that you have to save 30% – 50% of your Bausparsumme to reach allocation phase 2. The higher your Bausparsumme, the longer and the more you will have to save before you can get your Bausparloan in phase 3 of your Bausparvertrag.
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