The awful truth about Bausparen plans

[Starshollow 6,069]

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.

 

 

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.

[john g. 37,685]

Thanks for mentioning that, Starshollow! I´ve been in the finance/insurance business for nearly 20 years and have never sold or even offered a Bausparvertrag. Ask the " salesman/woman " at the bank what ALTERNATIVES you have, whether for a mortgage or as a savings plan. They LOVE offering young people this crap with lovely pictures of a house they´ll never be able to afford with Bausparen. They do the same with VWL saving ( where many employers offer up to 39 euros a month as a free choice for employees to save/invest for 6/7 years, renewable.

 

To buy a house or ANYTHING expensive you need money :ie a higher yield long term than the inflation rate. Bausparen is automatically lower-yielding than inflation. It is only good business for the banks and currently again part of the Schublade selling ( guys and girls: sell X amount of this in the next month, ok ). That´s how banks operate.

 

Well pointed out, Starshollow!

I am a professional independent insurance broker and authorised advertiser. Contact me.

[Lorelei 1,881]

Thank you for this useful info! My bank offers a BHW Bauspar plan. Here's an apparent case of misselling (plus other reviews).

[the.frollein 6,715]

Thanks for that info, Starshollow. I had a Bausparkonto years ago - not that I ever harbored any ambitions of buying a house, but I saw it as a way to get the VWL from my employer (was told it was the *only* way to take advantage of that) and save up over time. Must admit that it was a nice boost when came time to cash it in, although it was actually less than I thought it would be. Now I know why... and have immediately scrapped any plans to ever do that again!

 

On a related note: Do you (or John G) have any recommendations in terms of regular savings for my godchild? Not being terribly fluent in finance language, I had started a Sparbuch, until I realized that was not going to be very successful in terms of interest. Someone recommended the Wüstenrot Jugendkonto to me, are you familiar with that? Would you recommend it? Or do you know of other savings schemes - I need something where I can put a small amount away monthly, and hopefully leave it to earn a bit of interest as well.

 

Thanks in advance for any advice you can give!

[Bigfoot 743]

I am not very familiar with Bausparen. But in general any financial product in any country in the world that markets itself by saying that it takes advantage of certain tax exempts or deductions, is often more profitable for the bank / insurer than for the customer.

 

At least you should be extra critical on the terms, conditions, and life-time costs when these products are offered to you.

[john g. 37,685]

 

Thanks for that info, Starshollow. I had a Bausparkonto years ago - not that I ever harbored any ambitions of buying a house, but I saw it as a way to get the VWL from my employer (was told it was the *only* way to take advantage of that) and save up over time. Must admit that it was a nice boost when came time to cash it in, although it was actually less than I thought it would be. Now I know why... and have immediately scrapped any plans to ever do that again!

 

On a related note: Do you (or John G) have any recommendations in terms of regular savings for my godchild? Not being terribly fluent in finance language, I had started a Sparbuch, until I realized that was not going to be very successful in terms of interest. Someone recommended the Wüstenrot Jugendkonto to me, are you familiar with that? Would you recommend it? Or do you know of other savings schemes - I need something where I can put a small amount away monthly, and hopefully leave it to earn a bit of interest as well.

 

Thanks in advance for any advice you can give!

 

I´ve had a look at the Wüstenrot Konto, the.frollein. 0.33% per cent interest p.a. It´s nothing but a giro account with a marketing name. It depends how long you want to save...if for at least 10 years on a regular basis, it´s mostly more profitable ( despite ups and downs ) to have an equity funds (Aktienfonds). There are, however, no guarantees or fixed interest rates...rather it´s based on the stock market(s). You can often expect to average 6-8% p.a. over a long period - the longer the better. Given the fact you mention you have a Godchild, may I assume you´re thinking long term

I am a professional independent insurance broker and authorised advertiser. Contact me.

[john g. 37,685]

Whoops: for some reason, my question mark is no longer working on my computer...!!!

I am a professional independent insurance broker and authorised advertiser. Contact me.

[the.frollein 6,715]

 

I´ve had a look at the Wüstenrot Konto, the.frollein. 0.33% per cent interest p.a. It´s nothing but a giro account with a marketing name. It depends how long you want to save...if for at least 10 years on a regular basis, it´s mostly more profitable ( despite ups and downs ) to have an equity funds (Aktienfonds). There are, however, no guarantees or fixed interest rates...rather it´s based on the stock market(s). You can often expect to average 6-8% p.a. over a long period - the longer the better. Given the fact you mention you have a Godchild, may I assume you´re thinking long term

Thanks John! I need something longterm, but I don't have a lot of money upfront, which as I understand it puts paid to the Aktienfond. Ideal would be something where I could pay in approx 10 Euros a month (plus a bit more for birthday and Christmas) over the next... erm... 16 years, I guess. He's just turned 4 now, so I'm thinking until 20. Or 18? Whatever, I'm sure you get the idea.

[john g. 37,685]

Hmm, not sure off the top of my head whether 10 euros a month would be enough. 25 would work...plus stocking up with birthday and Xmas money. Are there any extras you could do without (eg, eating, paying rent) ? :)

I am a professional independent insurance broker and authorised advertiser. Contact me.

[the.frollein 6,715]

Well... I *did* want to lose a bit of weight, now that you mention it! :D

[Starshollow 6,069]

the frollein: I hear that often that people who want to do something with their VWL (VErmögenswirksame Leistungen) are being told that they can only use BAUSPAR... which again is total BS. If you are risk adverse, you can use a simple savings plan with any bank, if you like to see your money really work for you long term, you can put it directly into investment funds, too - hundreds of options available for far little initial costs than a bloody BAUSPAR contract.

 

With regards to saving 10 EUR per month... as John said, that is a wee bit too short for an investment fund. 25 to 50 EUR each month is usually required. I have one more idea what you could perhaps do instead, but Ihave to check some details first in order to figure it out - will let you know later today or tomorrow

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.

[Leegit 42]

I don't understand the dilemma people face. If you want to save money, open a second "normal" savings account, separate from your daily expense account, and deposit money every month in it.

[HellesAngel 1,889]

Thanks for the info Starshollow - I like the way your article reads if you treat 'BS' to mean Bauspar and also 'bullshit'. Apparently the difference between the two isn't so great ;)

[HellesAngel 1,889]

Did you ever hear of inflation Leegit?

 

BTW, great username...

[Hutcho 2,227]

 

I don't understand the dilemma people face. If you want to save money, open a second "normal" savings account, separate from your daily expense account, and deposit money every month in it.

 

Yeh, and get a whopping 2% interest on that money, meaning that you're actually losing money when taking inflation into consideration.

[Guest]

oh and if you ever do stuff to minimise your tax do not expect your tax return back in less than 8 months. I just found out after 6months that the finanzamt tried to stuff me over. I wanted to claim all my initial costs on buying an investment building. and then using the note from my accountant showing what I was going to get back to finance number 2. the finanzamt changed my all in one year claim to claiming it over 20years. hence sending me a big fat bill. after contemplating burning down the accountants office for getting me in huge fiancial shit and lying I approached him calmly and he said they do this all the time and now we have to fight them. it could take months again.

 

I will the tool who tried to fuck me over a visit after I get my return and say thanks for doing business I cant wait for next year when I get a tax return larger than your yearly salary again.

 

In australia its common to get your tax back in less than a week even with strange investments. my record was 2 days after submission. the accountant said he has had cases go one for over 18months that he finally won. here they dont even give you interest on the withheld tax you get back. In australia you do.

 

thanks and welcome to germany

[HellesAngel 1,889]

Sorry to hear of your predicament - each Finanzamt is different, the Munich one is getting better year on year, and at an alarming pace. Same with most of the civil servants round here - sometimes I can hardly believe it.

 

Where did you find your tax accountant? This is not a topic for this thread, so please feel free to start another, but there is a huge spectrum ranging from the criminally inept & greedy to the wonderfully honest & creative. Yours could be somewhere in the middle, tending towards inept - it's all about how he presents your case. If he does it in a manner that arouses suspicion then the FA will bugger you around, a more competent guy may achieve the same results with less hassle.

[Guest]

well he is a member of the lohnsteuerhilfeverein so is partially subsidised by the govt I chose him coz his office is under my apartment and i travel a lot so its a great convenience.

 

I was told people in these institutions generally are more reliable than some dude sitting in a home office in a dodgy part of town.

 

I also live right near the finanzamt so the short stroll in a few months with a huge grin and the "i told you so" will be more rewarding than the money isself

[garry entropy 776]

They LOVE offering young people this crap with lovely pictures of a house they´ll never be able to afford with Bausparen. Well it worked for us.

[Guest]

Thanks for posting this Starshallow - very helpful information contained within. We are very grateful to you for helping us out of a sticky Riester/Bauspar situation, and hopefully information such as this will help others from falling into this trap.

 

As an aside, it is astounding how pushy these fellows can be - it must really be good business for them, or otherwise they are not very intelligent... After our first negative experience (where the broker didn't want us to make another meeting at my request, but encouraged us to sign on the day), a second broker tried to sell us this programme. And that was after my husband said explicitly that we didn't want a Riester scheme. Unsurprising, we saw such persistence as a warning light, and didn't want a bar of his offers! So, rather than offer us something we might actually have been interested in, he continued down the Riester path, thereby totally alienating us - not very smart...