Innovating Bausparen

Why is Bausparen not an attractive product?

Created primarily to hedge against the volatility in interest rates, Bausparen accounts act more as insurance than savings product. Since interest rates in Germany have remained mostly stable and have been low for decades, Bausparen is not an attractive product anymore. Some of the banks even offer up to 110% financing. In the following article, we will look at how Bausparen works and why it doesn’t excite the high-level consumer anymore.

Bausparen account for a home purchase

Bausparen is a combination of a deposit and a loan agreement. It is used to finance the construction or purchase of a property.

Bausparen is an alternative financing tool for home purchases. With a Bausparen contract, the homebuyer enters into a long-term agreement to make monthly deposits for a duration of time at a lower-than-market interest rate and later become eligible for a mortgage that charges at a fixed lower-than-market interest rate.

The product enables homebuyers to shorten the time required for home purchases and protects them against interest rate fluctuation.

The Concept

The concept of Bausparen is to pool multiple potential homebuyer’s savings into a Bausparen fund.

The fund typically consists of saving contributions, loan repayments, and deposit credit interest. The act of pooling saving streams together amplifies resources and shortens the time required for a home purchase. Since Bausparen is a closed system independent of the market interest rate fluctuations, participants can enjoy fixed home loan rates. Typically, only specialised credit institutions and Bausparkassen can offer Bausparen contracts.

Business Model

Bausparen members deposit at a low-interest rate (dependent on the target amount of savings; e.g., range between 0.2% to 4.0%) in exchange for a fixed and low home loan rate (e.g., effective annual interest rate (EAR) range between 2.01% to 3.33%). Bausparen structure eliminates the risk of change of interest rates.

In general, the allocation of Bausparen fund from specialised credit institutions or Bausparkassen to Bausparen members for construction or property purchase happens when a minimum saving sum of 30%-50% is reached.

The allocation order depends on each member’s valuation number. The valuation number is calculated based on the savings sum and the savings period. Members with the highest valuation numbers have the priority to receive Bausparen allocation due to the commitment and contribution to the closed Bausparen fund system. The Government often supports Bausparen because home building and ownership are the high-ranked economic objectives of the government.

Bausparen as a Tool

Mortgage borrowing terms are most optimal when used to finance 50-60% of the property. With 20-30% Bausparen financing, homebuyers only need 20-30% of other financing tools.

Case Study

Alice and her husband plan to purchase a €400,000 property, with a 20% Bausparen loan financing mix. They select the ABC package from XYZ bank, a combination of €50,000 target amount of savings and a €30,000 net loan. Based on the Komfort tariff, a 10‰ (based on the target amount of savings) monthly interest and repayment instalment is required. Additionally, the tariff also includes contract fees, option prices, annual account fees, and loan fees.

Bausparen: An untapped opportunity

As of 2018, there are a total of 27 million active Bausparen accounts in Germany.

1 out of every 2 German households has at least one Bausparen contract. Every year, 650K young people under the age of 25 create a Bausparen contract.2

Given the popularity of the product and the widespread customer base, there is a clear interest amongst users, even though the benefits aren’t as lucrative.

Is it possible to innovate Bausparen account and turn it into an exciting product? Would you like to build your next venture to solve the challenges of home buying?

Do send across your comments and thoughts on this piece to Sushant Chavan (sc@ampolon.ventures)

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