How can I secure favourable interest rates for real estate financing?

Rising interest rates may have put your dream of buying your own home in Germany in jeopardy - or mean you’re facing a tricky time ahead when your mortgaged property comes up for refinancing. Are there any options left for securing favourable interest rates? Peter Kleinwӓchter from Your German Mortgage explores a little-known financing instrument. 

Anyone who is currently looking for a property and needs the corresponding financing will have been sobered to discover that interest rates have almost tripled compared to January 2022.

A large proportion of prospective buyers will therefore find that the option of buying a flat or a house has moved out of their reach; the monthly burden for interest and repayment is simply too high. In many cases, the comparison between buying and renting is no longer in favour of buying a property.

In addition, property owners who have taken out financing in the last five years must expect follow-up financing that will be far more expensive than the favourable interest rate from the past.

Is there a means to respond to these two scenarios? Yes, it is possible. A financing instrument that is hardly in demand in times of low-interest rates has awakened from its slumber. The building savings contract.

The building savings contract

But what kind of financing instrument is the building savings contract, how does it work and how can it contribute to problem-solving? Let’s dig into the history a little bit…

Since the beginning of the last century, the building savings contract has been an option open to people wanting to save and finance a home in Germany. The main objective of the building savings contract is to secure low-interest rates for the future and thus to know the exact credit rate for the loan as soon as you start saving it. To balance the low-interest rate on the loans, the interest rate on savings is also low. 

How can I use a building savings contract to finance a property purchase?

Building savings banks are a community of like-minded people. The capital of the savers is used to provide buyers with loans, at very low-interest rates.

To put this more simply, a building savings contract sees you put a monthly amount into a savings account over a few years. You then have the right to use your credit balance, and also secure a loan with a fixed (low) interest rate, either to purchase a property, modernise one you already own, or fix follow-up financing. The loan has to be repaid in a relatively short time. 

From this basic principle, building societies in Germany have created a huge variety of products with different flexibilities, maturities, savings, credit and loan interest rates - but all follow the same pattern of saving followed by borrowing and repaying. 

In the current market, this would allow you to secure a loan interest rate of around 1,25 percent for the future. You would be eligible to receive it after as little as three to five years of saving. 

Are there any other options?

You can also use building savings contracts for other things. For instance, if you do not need a loan, you can use your saved capital at any time. 

A building savings contract can also be given to the children as a gift. German grandparents and parents sometimes take out these contracts for their grandchildren and children as a way to provide for the future. 

Considering a home purchase but concerned about interest rates? Your German Mortgage has developed interesting concepts for its expat clients together with a large German building society. Financing of up to 10 percent of the purchase price of a property is possible with a good credit rating, even for Blue Card holders. Get in touch today to find out more.