From what I see what old and new clients show me when having talked with their banks about either investment/savings or mortgage financing, German banks accross the board are now for several months already pushing BAUSPAR contract left and right on everyone.
I think there are two reasons for banks to do so:
1. In contrast to pension plans or other insurance based investment products they otherwise loved to sell at high costs to their clients, BAUSPAR is the one product left on the market where they do NOT have to disclose the actuall and total effective costs for the plan in full. This loophole in the laws makes the BAUSPAR plans far more attractive to sell thru German banks than some other investment tools where they have to disclose the costs or otherwise face dire liability claims if not. Thus BAUSPAR seems to have become one of the last niches in finance for banks and others to milk unsuspecting clients…
2. At the same time, the very low current interest rate makes mortgages now or later very attractive for people and since they also have not really to disclose the effective interest rate for the total BAUSPAR plan (only for the actual mortgage loan which is only part of the equation) folks are attracte by the seemingly even lower interest rates from BAUSPAR plans
The development I see and some cases I recently had on my table are reason enough for me to disclose the awefull total bad truth about BAUSPAR plans which I will abbreviate in the further text as BS which also fits because mostly it is pure and unadulterated BullShit what clients are offered.
Following I show you to typical cases which are currently offered:
I. BS as a savings tool if you want to invest money regularly for you or even your children/grandchildren.
II. BS as part of an immediate mortgage financing. This has puzzled me for some time why anyone would want to do that. But its been offered often and at first glance looks so attractive that I have to explain why it is not and why a normal mortgage financing virtually always will beat the upfront BS mortgage financing
I. Why BS is usually a poor savings instrument
The problem with BS as savings instruments is that during the entire period of saving money you get only a very low interest awarded on your savings while you do usually have to pay immediately upfront costs based on the total you are going to save in this plan. So, you are incurring a lot of costs initially and then lose on profits of your savings for many year in order to get a (potentially/hopefully) lower interest rate for a mortgage in the future – and on top of that often in cases where people do not even know if they ever will actually use the mortgage option or not.
Typical case I was presented the other day is this: someone wants to invest 200 EUR per month to build up capital mid-term. He/she might want a mortgage in some years but it not entirely sure. The offer from a large German bank is to invest into a BS plan like this:
Pay 200 EUR/month for 7 years 10 months and then become eligible in October 2019 for a total mortgage of 38.500 EUR at an interest rate of 3.75% (effective 4.34 %)
Here now follow the list of smokescreens put up to confuse the client:
a) The quote mentions two different interest rates for the savings period of 7y10m, the typical 1% plus as it looks another 2% and another bonus of 616 EUR at the end. What the bank advisor conveniently forgot to mention to the client (I asked) and which is hidden in the small print a couple of pages later is this:
The extra interest rate is only available IF you do not upon finishing your savings period decide to actually take the mortgage option. So, the still rather meagre 3% p.a. plus bonus are only available to you if use this plan only as a savings plan for your money and nothing else.
When looking at the numbers stated in the quote (total investment during 7y10m = 19.416 EUR increases to max 21.705 EUR at the end in this case) you are looking at an effective interest rate for your investment of 2.7% p.a. – why would anyone want to do that? Of course if you’d tell people right away these fact, nobody would, which is why the truth is so nicely hidden in the small print. Btw: the bank charges an initial 616 EUR in fees out of which they get their commission.
Second smoke screen: you pay in about half in order to get the full 38.500 EUR mortgage, so the actual mortgage amount you gain theoretically is only 18.971 EUR (after fee deducting and all).
c) Third smoke screen is the interest rate for the mortgage – because it leaves out the interest costs you incur during the savings time. There is a really excellent tool publicly available at the German consumer protection agency’s STIFTUNG WARENTEST website here: http://www.test.de/t...825589-2825589/
If you download the easy to use spread-sheet computation and use the numbers like in my case, you find out this: If comparing the BS plan – now under the assumption that you actually use the mortgage option and thus only get 1% interest rate p.a. for your investment during the 7y10m period of saving – with a simple other form of investment where you generate, say, 4 % p.a., and down the road you’d get 7 years 10 month from now a mortgage from any other bank for, say 4.5% p.a. you be better off by more than 2.000 EUR in comparison to the BS plan. Or, phrased differently, you could afford a mortgage in 7y10 month from now with an effective interest rate of 7.74 % p.a. and just break even with the BS plan.
So, the long and short of it, there are very few scenarios imaginable where a BS plan with using the mortgage option is really better than saving the money in other ways and forms and then get yourself a normal mortgage later.
If you have received recently a BS plan offer, try to hack the numbers from this quote into this excellent tool from Stiftung Warentest and find out yourself. If you are uncertain about certain numbers, ask here in this thread for explanations or, if you are too shy for public, send me a PM or better even an email and I’ll explain you how.
II. BS as immediate mortgage instrument (i.e. without prior saving up for years)
This is also something I see recently quite often, especially when people came to me to get a mortgage quote and then went to their “Hausbank” to see if they can get a better deal (which is entirely normal and fair, no problems there from my side, best quote wins the deal, period). Because often the banks cannot compete with the mortgage quotes I got my clients, they are trying to muddy the water with these instance BS mortgages as part of the deal.
Most recent case looks like this:
Client wanted to purchase a property for 444.000 EUR plus costs. Mortgage was sought for about 377k EUR. My best offer from a German bank came down to an effective interest rate across the board (including subsidized KfW mortgage parts) of 3,97 % p.a. fixed mostly for 15 years.
The client’s bank worked out an offer that was comprised out of a “normal” mortgage with fixed interest for 15 years with 3.92 % effective per year AND a BS about 138k EUR with an effective interest rate according to quote of 3.10 % - so, obviously much better than what I offered…… until you do the math. Which is pretty hard even for a professional which is why again I recommend using a tool offered by STIFTUNG WARENTEST for such instant mortgage BS quotes here: http://www.test.de/t...159356-2159356/
As the STIFTUNG WARENTEST points out there, the BS quotes never (!) show the true effective interest rate as they conveniently forget to include the interest losses you have from the savings part. In this case they lend you the money at once but still you have several years of “savings” first with little interest before you pay off the mortgage entirely.
In the client’s case, when using this computation tool which, because it comes from such a well-respected and unbiased source as STIFTUNG WARENTEST is certainly beyond any doubt – when puniching in all the number from the quote it turned out that the actuall, real effective interest rate was indeed 4.41 % and thus much worse than anything a normal bank mortgage had to offer. Plus, there even was a risk that it could get worse or more expensive for the client later down the road because the fixed interest rate was only guaranteed for a given time and then the BS plan “assumed” a further financing again based on 2.85% after the guarantee time run out – which is, phrased friendly, highly unlikely or, phrased differently, another total BullShit.
If you got yourself recently some quotes along this line, try out this excellent computation tool. If you are uncertain about certain numbers which need putting in (where to find, which ones to use) contact me, happy to help.
So, now I have given you, I hope some interesting facts why an independent financial advisor like me will virtually never offer anyone a BAUSPARPLAN at all and why, if you receive such offers, you should be aware that the person or institution offering them to you has only their own best interest in mind and not yours…the BAUSPAR fox ( an icon of German marketing introduced many years ago by one of the major Bausparkassen and such something most Germans know by heart) is in the end just another predator after your money. Looks cute, though.