Following a period of historically low mortgage rates, the financing landscape for property has changed noticeably. While ten-year fixed-rate periods sometimes cost less than one per cent between 2015 and 2021, current market conditions demand far more forward-looking budget planning. In this context, building society savings contracts are once again gaining relevance, serving less as a classic capital investment and primarily as an instrument for risk mitigation and calculation certainty.
Sascha Mermann, Managing Partner at VON POLL FINANCE, illustrates the changed framework conditions using a model calculation: with a loan volume of 350,000 EUR, a borrowing rate of 4.1 per cent and initial repayment of two per cent, the monthly burden amounts to around 1,770 EUR. At an interest rate of one per cent, this sum was still around 875 EUR. In view of uncertain interest rate trends in the coming decades, the long-term affordability of monthly instalments is moving to the centre of financing structuring for buyers.
Predictable terms and contractual parameters
The principle of building society savings is based on securing a fixed loan interest rate early on for a later date. Typically, 40 to 50 per cent of the total contract amount is saved first. As soon as the minimum balance and the required valuation figure are reached, the contract is allocated. The loan rate, deposit rate, arrangement fee and repayment terms are fixed from the inception of the contract. The exact date of allocation, however, is not guaranteed to the day, which is why borrowers should factor in appropriate time buffers.
- —Hedging expiring fixed-rate terms when there is a definite refinancing requirement
- —Financing renovations and modernisations, often without a land register entry and thus without additional notary fees
- —Combining gradual equity accumulation with early loan interest rate hedging for future property acquisitions
Application in refinancing and interest rate scenarios
Particular advantages emerge with expiring fixed-rate periods. Dr Lucie Lotzkat, Managing Partner at VON POLL FINANCE, points to borrowers from 2016 who financed at 1.75 per cent at the time and took out a building society savings contract in parallel. Upon allocation, this contract now redeems the remaining debt at a borrowing rate of 2.29 per cent, whereas regular refinancing on the open market would stand at around four per cent, representing a saving of around 400 EUR per month.
Financing advisers recommend testing household budgets against various scenarios. With a remaining debt balance of 265,000 EUR and two per cent repayment, the monthly instalment at an interest rate of 3 per cent stands at roughly 1,105 EUR, at 4.5 per cent at 1,435 EUR, and at 6 per cent at around 1,765 EUR. Alongside the interest rate advantages, total costs must be taken into account: the arrangement fee typically amounts to 1 to 1.6 per cent of the contract sum, whilst building society loans can require higher monthly instalments due to contractually stipulated, often tighter repayment cycles.
