A mortgage for your renovations? Here are your options
Yes, you found your dream house: a fixer-upper. Some serious renos are on the horizon! Now you’re wondering how you’ll finance those renovations. You could, of course, break open your own piggy bank, but financing your renovation as part of your mortgage may be a better option. We’ll walk you through it.
Increase the value of your home
Renovations can drastically increase your property value. Is the kitchen in need of an extension or are you dreaming of a dormer window? These are prime examples of value multipliers for real estate. Increasing the value of your dream home isn’t only good news for you, it’s good for the potential to finance your renovations together with your mortgage.
To determine the exact amount you can finance, the lender will use the value of your home after the renovations as compared to the value before renovations. Both values are recorded in the appraisal report. An appraisal specification is required to determine the value of your home after remodelling. In this specification you’ll record exactly what you’ll be renovating and how much money is required for these works. As buyer, you can prepare this specification on your own. Based on these documents, the lender will evaluate to which extent you can finance the planned works with your mortgage.
In most cases, 70% of the renovation can be financed. The exact amount will be recorded in the appraisal report.
Renovation costs higher than the value gain?
If the appraiser determines that the cost of renovations is higher than the added value of your new home, you will need to cover the portion of the costs exceeding the value gain from your own means. This is because the lender will only finance works which result in added property value. If necessary, take these unfinanced costs into consideration when forming your budget!
The escrow account
Funds budgeted for your renovations are deposited into a so-called escrow account. This account contains the portion financed by your lender as well as your own investment. Funds are deposited into a blocked bank account. Invoices directly linked to the renovations are paid via this account. You can view this as a separate mortgage pot.
Energy Efficient Features
Are you planning on making your home more sustainable? You’ll receive additional benefits from several lenders.
You can finance 106% of the post-reno property value for energy-saving measures rather than the standard 100%. In other words, you can borrow up to 6% of the purchase price for energy efficient measures without having to use own funds. This is based on the condition that the full amount is invested into the efficiency of your new home.
Do you have questions concerning your renovation plans and mortgage or are you interested in finding out how Viisi can assist with appraisals? Give us a call for an obligation-free initial consultation.