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In the fast-paced world of home loans, building societies are reporting a surge in new contracts like never before. With rising interest rates causing unease among potential homeowners, many are racing to secure the attractive rates that building societies are currently offering. However, it's vital to understand the ins and outs of building society contracts before diving headfirst.
How does building society savings work?
A building society contract has two phases: saving and loan. In the saving phase, you contribute a portion, usually between 40 and 50 percent, of the building society sum, with interest rates on savings accounts averaging between 0.01 and 0.1%, according to FMH financial consultancy. There's also a setup fee, ranging from 1 to 1.6 percent of the building society sum. The combination of a low interest rate and setup fee often results in a lower saved sum compared to the total amount saved over ten years. After the saving phase, the loan is disbursed. Rates on building society loans over 100,000 euros currently fluctuate between 0.95 and 2.25%.
What are the perks?
Building society savers benefit from the convenience of not needing to prove their creditworthiness, making it an advantageous option for those who might struggle with traditional construction loans due to age. Additionally, the interest rate agreed upon in the contract remains fixed, even if conventional loans have become more expensive. Max Herbst, an FMH financial consultant with decades of financing experience, advises that for those over 60 planning to renovate or rebuild their homes soon, a building society contract could be the perfect choice. For those eager to own a home, it could be a stepping stone in overall financing.
What are the drawbacks?
The interest rates during the savings phase are quite low as compared to current fixed-term and daily money offers. Furthermore, the building society loan must be fully repaid within a relatively short period, typically between six and 13 years. Unlike a classic loan, the disbursement date of the loan is not fixed. The loan is only granted when other building society savers have contributed sufficient funds.
Time for alternatives?
For those looking to capitalize on favorable interest rates with a building society contract, the bet is on interest rates rising significantly in the coming years. However, for those who know they will be building or buying in the near future, it might be more prudent to consider saving for a high-yield short-term fixed-term deposit or saving for a good fund and taking out a conventional loan. The more equity that flows into a real estate financing, the lower not only the loan but also its interest rate.
Other saving methods for home financing:
1. Fixed Deposit Contracts
These are traditional savings methods that allow individuals to lock their money at a fixed interest rate for a specified period, ranging from a few months to several years. While the interest earned is typically higher than a regular savings account, withdrawals are restricted until maturity.
2. Individual Savings Plans (ISAs)
ISAs provide tax-free savings for individuals with flexibility in withdrawals and annual contribution limits. They're suitable for short-term savings goals.
3. Investment Savings
Investment savings involve saving through stocks, bonds, or mutual funds, with the potential for higher returns over time. However, these come with risk and are typically used for long-term investment strategies.
In comparison with building societies, they offer stability and security for both savers and borrowers, while fixed deposits, investments, and ISAs offer different advantages in terms of interest rates, flexibility, and risk levels.
- Building societies have a unique savings structure, with individuals contributing a significant portion of the building society sum over a saving phase, earning interest rates averaging between 0.01 and 0.1% according to FMH financial consultancy, and a setup fee ranging from 1 to 1.6%.
- Unlike conventional loans, building societies do not require proof of creditworthiness, making them an advantageous option for those who might struggle with traditional construction loans.
- However, the low interest rates during the savings phase and the relatively short period for loan repayment, ranging between six and 13 years, are key drawbacks of building society contracts.
- When considering alternatives, individuals seeking favorable interest rates might consider saving for a high-yield short-term fixed-term deposit or saving for a good fund and taking out a conventional loan, as the more equity that flows into real estate financing, the lower both the loan and its interest rate.
