Building society loan: a classic form of construction financing

Interest rates that are fixed for a long period of time and the associated high degree of predictability continue to make the building society loan attractive for many people. This is how the building and loan associations in germany paid out a sum of over 9 billion euros to home savings customers in 2018. What exactly is a building society loan and whether this financing classic is also worthwhile for you, you can find out here.

What is a building society loan?

The bauspar loan is a component of a bauspar contract. To do this, you first agree with your building society on the desired building loan amount. The savings phase then begins, during which you pay in a fixed amount each month. If you have paid in long enough and reached a certain valuation figure, your building savings contract is ready for allocation. This is usually the case when you have paid in around 30 to 50 percent of the building savings sum. The difference between the agreed bauspar sum and your payments is then paid out to you by the bausparkasse in the form of a bauspar loan. This is usually characterized by particularly favorable interest rates. However, you must bear in mind that it can only be used for residential purposes. This includes, for example, the construction and purchase of a property, but also the renovation of an existing property.

Building savings loan: advantages and disadvantages

The building society loan convinces by planability and financial security. However, due to high costs and the earmarking of the loan, it is not necessarily the right choice for everyone.

The advantages of the building society loan

A man sits at a table with a woman and explains the terms of a bauspar loan

Many savers still opt for the classic bauspar contract, especially because of the high level of security and the state subsidies. Already at the time of the conclusion of the contract you know what financial burden you have to expect in the loan phase. The interest rates for your building society loan are not dependent on the capital market and are fixed for the entire term of the loan. This means if construction rates rise in the meantime, you made the right decision.

In addition, unscheduled repayments are usually not a problem with a building society loan. If you have enough money at your disposal, you can pay any amount into your building society loan and thus significantly accelerate the repayment of the loan. With regular real estate financing, on the other hand, unscheduled repayments can only be made within a fixed framework agreed with the bank. The early full repayment of an annuity loan is even associated with significant costs in the form of the so-called early repayment penalty.

The disadvantages of the building society loan

However, the bauspar loan also has decisive disadvantages compared to common annuity loans. On the one hand, you do not know in advance when your building savings contract is ready for allocation and when you will receive the loan. With a regular real estate loan, you can simply take out the loan when you have found the suitable property.

On the other hand, a bauspar loan usually has to be repaid within a very short period of time – often within a period of about 7 to 12 years. This means that you have to expect a high financial burden during the loan phase.

Last, you should remember that you can not directly compare the conditions for a building society loan with those for an annuity loan: A bauspar contract is accompanied by acquisition costs of about 1 to 1.6 percent of the bauspar sum. With regular loans, the additional fees are usually lower. Therefore, it is impossible to compare the two interest rates directly with each other.

Take out, refuse or postpone a building society loan?

If your building society contract is ready for allocation, the building society will contact you by itself and inform you about it. You then have 3 options:

  • You can take out the building society loan as planned and use it to finance your real estate project.
  • You can leave the offer for a while and accept the loan later.
  • You can simply refuse the loan.

If you want to take out the loan, you usually have to inform your building society about it in writing. To do this, simply fill out the form that should be enclosed with the notification that the loan is ready for allocation. Here you must also specify for what residential purposes you want to use the money. The bank will subsequently pay you the building savings sum, which is made up of your saved balance and the loan.

If you would like to use the loan at a later date, you can postpone the allotment of the loan. You then continue to pay into your building savings contract and simply extend the savings phase a bit. But be careful: don't try the patience of your building society too much. If you have still not drawn down your building society loan 10 years after it has matured for allocation, the building society has a special right of termination.

You should only reject the bauspark loan if you clearly exclude a real estate investment and need the money for other purposes. Because if you refuse the loan, all government subsidies will also be cancelled.

How to cancel a home savings loan?

If you unexpectedly inherit a large sum of money or otherwise come into assets, you have an easy time with building savings: since unscheduled repayments are possible in most cases without any problems, you can simply settle the outstanding amount and thus avoid further interest payments. If you are unsure how your building savings contract regulates special payments, you should take a look at your individual contract conditions.

Even if the interest rates of your building society loan seem rather high compared to regular real estate loans, you can secure the more attractive conditions by rescheduling your loan. During the loan phase you can cancel at any time and without observing a period of notice. Keep in mind, however, that in this case the building society wants the loan amount directly back: before you send your notice of termination, the follow-up financing should therefore be in the clear.

Immediate bauspar loan: useful or not?

With a building savings contract, you first have to pay in for years before the contract is ready for allocation and you can finally fulfill your dream of owning your own four walls. Since construction interest rates are currently very low, but real estate prices are likely to continue rising, many people do not want to wait that long. As an alternative, some banks offer so-called immediate building savings loans here.

With such combined loans, the agreed building savings amount is paid out directly after signing the contract – only then does the savings phase begin. The actual order of building savings is therefore reversed: you first get the loan and only then pay in regularly. While standby letters of credit may seem attractive at first, they have come under increasing criticism. Often the conditions are not transparent and the actual effective interest rate is difficult to determine. In addition, you usually cannot repay immediate home savings loans ahead of time, which means less flexibility for you.

Conclusion: security and predictability thanks to building society loans

A bauspar loan comes with numerous advantages, first and foremost with a high degree of security and predictability. You know in advance what interest you have to pay during the loan phase, and especially if the regular construction interest rates have risen in the meantime, you make so a good deal. However, you should not neglect the disadvantages compared to regular real estate loans: you will receive the building savings loan when your building savings contract is ready for allocation. When exactly this will be, however, is not foreseeable beforehand. In addition, you must expect high closing fees. It is therefore worth taking a close look at regular real estate loans and comparing all options with each other.