The unique selling point of bausparen is that interest rates on deposits and loans are not only fixed once the contract has been signed, but they are often below market rates. The waiving of interest in the savings phase is the “option premium” that customers pay to guarantee a low fixed interest rate in the loan phase. It is this “option premium” which makes bauspar deposits “sticky”; it makes bauspar savings a truly long-term finance instrument, avoiding the usual mismatch between the maturity of deposits and housing loans.
Bausparen offers several advantages, including its simplicity and ability to mobilize long-term liabilities. Moreover, the ability of the bauspar system to function within informal environments is particularly relevant for emerging markets: In the absence of credit scores or formal income, it can provide a lender with proof that a borrower is creditworthy because of the mandatory savings period at the beginning of every bauspar contract. The commitment made during the savings phase, and the deposit that is accumulated, make formal scoring less important—the bauspar customer has already proven that she or he can make regular instalments. Another important advantage of the bauspar system is that it can offer long-term fixed-rate loans, even in environments where long-term fixed-rate funding is otherwise unavailable. A further advantage of the bauspar system is that it is usually run by specialist institutions that are regulated by a special law limiting their business activities to the field of housing finance.
For a bauspar system to work properly, the macro-economic environment needs to encourage people to save. Moreover, the inflation rate should be neither too volatile nor too high; single digit rates of inflation are recommendable. Macro-economic stability certainly is a precondition for a contractual savings system. Of course, all funding instruments profit from stability.