Renovating with a mortgage.

Why choose a mortgage to renovate?

A mortgage can be an affordable way to finance your renovation. The interest on a mortgage is often lower than on a personal loan, and the interest may be tax deductible, provided the loan is fully repaid within 30 years. For many homeowners this can be an attractive option to create more comfort or increase the value of their home.

Advantages of renovating with a mortgage

• Lower interest than with other loans
• Possibility of mortgage interest deduction
• Increase in your home's value, which can be beneficial in the long term

Disadvantages of renovating with a mortgage

• The mortgage often has to be revised, which can involve costs
• Higher monthly payments due to the extra loan
• Risk of negative equity if your home's value does not rise as expected

How much extra can I borrow for a renovation?

The maximum size of your mortgage is determined based on your income and the value of your home. Most banks offer the option to borrow up to 100% of the market value of your home after the renovation. This means that the value of the home after the renovation must be higher than the original value.

An appraisal is often needed to establish the expected value after the renovation. Banks use this value to determine how much extra you can borrow. In general, you may borrow up to 106% of the value of the home after the renovation if you make the renovation itself energy efficient.

Which types of mortgage are suitable for a renovation?

There are several ways to use your mortgage for a renovation:

Second mortgage

A second mortgage is one you take out alongside your current mortgage. This can be attractive if you still have a low interest rate on your existing mortgage, but you do need to take extra monthly payments and arrangement fees into account.

Increasing your mortgage

Increasing your current mortgage is often possible on favourable terms, especially if the interest rate is currently lower than on your original mortgage. This is usually the most affordable option, but not all banks offer this possibility.

Equity release or credit-line mortgage

A credit-line mortgage gives you a credit limit based on the equity in your home. This gives you the flexibility to withdraw what you need for the renovation and only pay interest on the amount you have withdrawn.

What costs are involved in renovating with a mortgage?

Renovating involves extra costs that you should factor in beforehand. The main costs are:

• Notary fees: when taking out a second mortgage.
• Appraisal fees: banks usually require an appraisal of the home's value after the renovation.
• Advice and brokerage fees: many mortgage advisers charge fees for advice and for arranging your mortgage.
• Arrangement fees: banks often charge arrangement fees, usually a percentage of the mortgage amount.
• Construction interest: this is the interest you pay on the amount you withdraw from the construction account.

What is a construction account and how does it work?

A construction account (bouwdepot) is a special account you can use to pay for the costs of your renovation. The amount borrowed for the renovation is temporarily deposited here, and you can submit claims throughout the renovation period. This way the money stays available for the renovation without you immediately paying interest on the entire amount.

During the term of the construction account you only pay interest on the amount you have withdrawn, so your monthly payments gradually rise as you withdraw more.

Can I deduct my mortgage interest if I use the loan for a renovation?

Yes, in many cases the interest is deductible. This applies when the loan is used to improve or extend your own home. It is important that you meet the following conditions:

• The loan must be repaid according to an annuity or linear schedule.
• The loan must be fully repaid within 30 years.

Specific situations in which the interest is deductible

• An extension or addition of extra living space
• Improving the energy efficiency of the home, such as insulation or solar panels
• Renovation projects that increase the value of the home

What steps should I take to use my mortgage for a renovation?

Step 1: determine your wishes and budget

Decide which work you want to carry out and what you need for it. Keep a realistic budget in mind and discuss it with a contractor if needed.

Step 2: request a mortgage advice consultation

A mortgage adviser can help you determine which options are possible for your situation. Mortgage advisers are often up to date with the current regulations and can assess which solution suits you best.

Step 3: calculate your new monthly payments

With an extra loan your monthly payments rise. Discuss with your adviser what the impact of this will be on your financial situation and consider any future changes in your income or expenses.

Step 4: choose the right type of mortgage

Depending on your situation, you can consider a second mortgage, an increase of your current mortgage, or a credit-line mortgage. Discuss with your adviser what the best choice is.

Step 5: arrange a construction account and start the renovation

With a construction account you can cover the costs of the renovation without having to withdraw the full loan at once. Submit claims as the renovation progresses.

When is renovating with a mortgage a smart move?

It is important to map out your financial situation carefully before you decide to use a mortgage for a renovation. Renovating with a mortgage is especially smart if:

• The value of the home is expected to rise because of the renovation.
• Your renovation adds value to your home, for example through an extra room, a dormer window or energy-efficient improvements.
• The mortgage payments are affordable in the long term and you have enough room in your budget for any setbacks.

A renovation can in many cases be a smart choice and contribute to the value of your home, but it is important to weigh the options and risks carefully. With the right information and guidance you can make the most of your renovation and enjoy the benefits a mortgage offers.