Building savings contract: Saving for real estate financing

A building savings contract is a special type of loan. Building savings contracts usually consist of a savings plan and a real estate loan and are concluded with a building society. The basic idea of building savings and the associated building savings loan is the promotion of home ownership. You conclude the contract if you plan to build or renovate a house in the future or buy an existing property.

The building savings contract quickly summarized.

• Special type of loan
• Consists of savings plan and real estate loan
• Is concluded with a building society
• Serves to promote home ownership

Compare immediately current conditions for your building savings contract in the Immobilien-Erfahrung.de building savings calculator.

Building savings: How a building savings contract works

When you conclude a home savings contract, you specify various points that remain the same over the entire term of the contract. For example, you specify your savings target, also known as the building savings amount, and the term. A typical building savings contract has a term of between seven and ten years.

The building savings contract then goes through three phases:

1. The saving phase
2. The allocation phase
3. The loan phase

You will now learn the details of the individual phases.

Savings phase: Savings period in which equity is built up

The savings phase is the first phase that a building savings contract goes through on the way to financing your property. During this time, you save a contractually agreed percentage amount of the building savings sum. In addition to the savings target, which is between 30% and 50% of the bauspar sum, the duration of the savings phase is also defined when the contract is concluded.

The monthly savings rate is calculated according to the savings amount and term. During the savings phase, it is also possible to make special payments in addition to the monthly payments or even to provide the agreed minimum building savings balance through a one-time payment.

The savings phase in summary:

• Fixed part of the building savings sum is saved up
• Over a set period of time
• Monthly savings rate depends on savings amount and term

As soon as the savings target is reached, the building savings contract enters the second phase.

Allocation phase: Distribution of the building society loans by the building society.

The second phase of bauspar contracts is known as the allocation phase. In this phase, the amount of the bauspar loan is determined. The amount is determined by the difference between the building savings sum and the building savings balance. In order for the contract to be ready for allocation, certain requirements must be met.

The requirements for an allocation of a building savings loan are:

1. The agreed building savings balance was reached
2. Further allocation criteria were met

The exact allotment criteria vary from one building society to another. As soon as the allocation conditions are met, the loan is allocated and can be drawn down. The loan can only be used for residential purposes. This includes, for example, the construction, purchase or renovation of a property.

The loan is tied to a residential use.

Loan phase: disbursement and repayment of the real estate loan

Once you have decided to take out the loan, your building savings contract enters the final phase: the loan phase.

It begins directly after the allocation phase and starts with the loan application. The terms and conditions of the loan were already agreed when the building savings contract was concluded. This is often an annuity loan.

The amount of the building savings sum determined at the beginning influences the amount of the loan and consequently also the monthly repayment installments. In contrast to a construction loan, which often leaves a residual debt at the end of the fixed-interest period, the home savings loan is repaid in full within the term.

The loan phase at a glance:

• Starts with the loan application
• Terms of the loan already specified at the time of conclusion of the contract
• Repayment is made in monthly installments
• As a rule, no residual debt remains outstanding

Advantages of building savings contracts: Security and promotion

Like any financing method, the building savings contract also has advantages and disadvantages. Building savings contracts offer a flexible combination of savings and security for the construction or purchase of a home. They are characterized by attractive interest rates, favorable loan conditions, tax advantages and deposit protection. In addition, a home savings contract can also be used as a hedge against unforeseen events.

The advantages summarized:

• Combination of savings and credit product
• Flexible repayment options
• Attractive interest rate and favorable loan conditions
• State support through premiums
• Safe variant of real estate financing

Disadvantages of building savings: High fees and long commitment

In addition to the advantages, there are also disadvantages, as with all financial products. Due to the necessary prior savings phase, home savings contracts are less suitable for immediate financing.

The disadvantages at a glance:

• Long commitment period
• Low liquidity
• Higher costs compared to other forms of savings
• No availability of building savings in emergencies
• No flexible repayment options

For whom is a building savings contract worthwhile?

A building savings contract is suitable not only for those who want to fulfill their dream of owning a property, but also property owners. In addition to construction or purchase, the loan can also be used for modernization or as a maintenance reserve.

When and for whom is a building savings contract useful?

• People who want to purchase real estate in the next few years
• Investors who want to use government subsidies to build up assets
• Home savings customers who expect interest rates to rise
• Real estate owners who value calculation security
• Home purchase financing supplement

If you belong to one of these groups, a building savings contract can be doubly worthwhile. Building savers are supported by the state and receive state subsidies under certain conditions. The subsidies include the housing subsidy, the employee allowance and Wohn-Riester.

Tip: Taking out a home savings contract is particularly worthwhile during periods of low interest rates.

Back to the Capital Investment editorial.

Building savings for your own property

With building savings, you benefit from various subsidies such as premiums from the state. You can use your building savings contract for the purpose of building, buying or renovating a house. However, a building savings contract is also interesting for property owners, for example to finance modernisation measures. The respective costs depend heavily on the provider.

Building savings is one of the top 5 most popular forms of capital investment among Germans.

Source: Statista

Procedure and phases

The strengths of a building savings contract lie in its fixed predictability. A bauspar contract consists of two phases, the savings phase and the accumulation phase. With a bauspar contract, you first save about half of the planned bauspar sum (see bauspar calculator), the other half is then given as a loan at a fixed interest rate.

There are many questions as already described, from what is the savings phase to how long is the term of a building savings contract to what is understood by a building savings contract? But also the advantages and disadvantages are important for many who want to start saving. What are the advantages of a building savings contract?

No equity capital necessary

The highlight of any building society contract is that it can be used without any equity capital at all, it can be set up anywhere, on site in branches but also online in comparison portals.

The disadvantage is that the payout is bound to strict regulations, and the risk of default is extremely low, especially in the case of old contracts. Did you already know? It is possible to convert building savings contracts into capital investments by paying premiums – however, this advantage is usually limited to the old contracts just mentioned. Unfortunately, such contracts are hardly ever offered in the current interest rate situation. The current yield of bauspar contracts is mediocre.

Facts about building savings

The most important 3 facts about the building society contract:

1. No equity capital necessary
2. Support through premiums from the state
3. Earmarked (according to strict regulations) for house construction, purchase and conversion

Building savings really pays off for everyone. It’s easy to take out, and the plan has a clear goal. Whether you want to live rent-free or save for retirement, building savings is a real must for building up equity.

Advantages

• No equity capital necessary
• Individual building savings plan that suits your needs (more under Building Savings Calculator below)
• Support through premiums from the state
• Fixed interest on credit balances
• Extremely low risk of default

Disadvantages

• Earmarked (according to strict regulations) for house construction, purchase and conversion

Back to the editorial Capital Investment XXL.

Building savings calculator

The calculation is intended to provide you with an initial orientation as to what purchase price you will be able to afford in the end. The indicated purchase price is an approximate, non-binding value. The following parameters are required for the calculation:

• Current cold rent (e.g. 900 Euro)
• Desired savings (e.g. 400 Euro)
• Move-in date (e.g. 8 years)
• Equity capital (e.g. 50,000 euros)

From these variables you would have the following result

• My possible purchase price
  292,000 Euro
• + incidental expenses (approx. 12 %)
  36,000 Euro
• My total costs
  328,000 Euro

You want to calculate yourself? Here you will find a good calculator for your building society contract:

• LBS building society calculator
• Real Estate Scout 24

Build or buy? New building costs

Build it yourself or buy it, that’s the big question! There are individual advantages and disadvantages to both. We take a look at the most important facts you need to consider when building new or buying real estate.

• More tips on building or buying? Read all about real estate as an investment here.

New construction has many advantages, including, for example, the various options you have as a builder. This concerns the design of the house but also the design of the property. You will be the first to move into the property, so everything is new and of high quality, including the technology in the house. Of course, there are also disadvantages, for example, craftsmen are rare and building a house is expensive. You will have a lot of work ahead of you, applications and also visits to the building site.

Average prices for building land 2017, source: Federal Statistical Office

Table: Construction costs, source: Federal Statistical Office

Loan term for house construction > 5 years

Almost all loans for real estate have a maturity of 5 years or more. Here is the stock volume of loans to households for house purchase with banks in the euro area in November 2010, in billions of euros.

Source: Statista

Expert tips for new construction

1. Check every building contract for errors, preferably by a competent person, such as a civil engineer, an expert or even an architect.
2. Ask to see the developer’s guarantees, which the company has deposited with banks. Should the developer go bankrupt during the construction phase, your construction would be secured.
3. Pay only according to the progress of construction, with each further, central step you transfer another partial amount to the developer
4. Cheap is never good in construction, you should pay attention to that, even when you are getting quotes. In the end, there are always pitfalls that you don’t notice as a private person.
5. Become a member of a landowners’ association, because here you can get legal and economic answers to your questions, even free of charge.

Helpful Links: Buy & Sell Real Estate

Finally, here are some helpful links for your real estate search:

• Real estate portal – Immowelt for the search
• Real estate portal – Immoscout24 for the search
• Luxury real estate agent – Real estate purchase and capital investments
• Real Estate Sales – IHV Real Estate Agents Germany