Are you thinking of buying a fixer-upper? If so, of course you’d also like to know how much you could spend on renovating that property. With a construction deposit account (‘bouwdepot’ in Dutch), you reserve a certain amount in a blocked savings account that is solely to be used for renovation work. How do calculate the amount for a construction deposit account though?

Construction deposit calculations

Calculate the costs by using a renovation specification

In order to calculate your construction deposit account, you’ll need to start by drawing up a renovation specification – in other words, an estimate of all of the costs related to your renovation. List which works you want to carry out or want to have carried out, which materials and services are required to realise your plans, and how much it will cost approximately. You can estimate this based on quotations from contractors and other workmen for example.

Please note: this is still an estimate. You will not have to present actual quotes at this time, or to know exactly what shade the bathroom tiles will be for instance.

Here is an example of a renovation specification.

Valuation figure before and after renovation work

The amount that is additionally financed through your mortgage will not automatically be as high as the figure in your renovation specification. In order to determine how much is additionally financed in your construction deposit account, the lender will work with the value of your house after its renovation as a figure, compared to its value prior to the renovation.

Both values are registered in an appraisal report. The appraiser will assess, among other things, which building work from your renovation specification will actually increase the value of your home.

The lender will then decide, on the basis of the valuation figure plus the renovation specification, to what extent you can additionally finance the renovation through your mortgage. Usually, this amount is about 70% of the total renovation costs. The exact amount will be registered in the appraisal report.

So keep in mind that you will need to pay for about one-third of your renovation work out of your own pocket!

Construction deposit account: calculation example

Here’s how to calculate the cost of a construction deposit account:

Let’s say you buy a house to the value of € 200,000 and renovate it for € 30,000, and the market value after renovation (and therefore the amount of your maximum mortgage) is € 220,000. At the time of the property transfer, the lender will transfer € 190,000 to the notary and the € 30,000 will remain in the construction deposit account.

You will need € 230,000 to cover both the purchase and the renovation. The mortgage is € 220,000 (maximum). This means € 10,000 of your own capital must still be deposited. You will need to use your own money to pay this € 10,000 amount (and other compulsory costs for the buyer) when the transfer of the house is completed.

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The construction deposit account as a separate reserve fund

The full amount that you register in your renovation specification will be added to the construction deposit account. This construction deposit account is a kind of blocked savings account, with which you pay all invoices that are related to the renovation work.

The lender will withhold the amount of the construction deposit account when transferring the property. The subsequent shortfall that arises because not all of the entire renovation is always value-enhancing, will therefore need to be immediately deposited with the notary upon the transfer of the property, from your own capital.

How do I calculate the monthly charges of my construction deposit account?

You will receive an interest payment (from most lenders) over the amount that you have not yet withdrawn from the construction deposit account. This interest is offset by with the mortgage interest that you owe. As long as the full amount is still in the construction deposit account, you will therefore only pay the repayment on your mortgage, and no interest yet, on balance.

As soon as money is withdrawn from the construction deposit account, you will no longer receive any compensation for that part. Your monthly payments will then increase because the interest compensation is no longer active. Your monthly payments therefore depend on the moment you have money taken out of your construction deposit account.

Calculating monthly construction deposit costs

Let’s say you buy a property for € 200,000, and are going to renovate it at a cost of € 30,000. The interest on your (annuity) mortgage is 2%.

No withdrawals

At the start, you pay the full amount of interest and repayment over the € 200,000 mortgage, which comes to € 739.24 per month. Over the € 30,000 in the construction deposit account you will only pay a repayment sum totalling € 61 per month. Thanks to the interest compensation, you will not yet be paying interest on your construction deposit account.

Withdrawing half the amount

When half of the amount has been withdrawn from the construction deposit account, there will still be € 15,000 available for the renovation. In the meantime, € 215,000 in mortgage has been taken out. The monthly charge at that time is € 794.68 for the mortgage + € 30 per month in repayments for the remaining € 15,000 in the construction deposit account. Together, that amounts to € 825 per month.

Full amount withdrawn

The moment the full amount is withdrawn from the construction deposit account, you will owe repayment and interest on the full mortgage sum of € 230,000. In total, that amounts to € 850.12 per month.

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Is there some money left in your construction deposit account?

We do not often see renovations that ultimately work out cheaper, but that can sometimes happen of course. In that case, you will have money left in your construction deposit account. If you report this to your lender, that remaining amount will be used for repayments on your mortgage.

You will therefore not receive the remaining amount yourself, but your monthly payments will decrease due to the repayment on your mortgage.

What if the renovation turns out to be more expensive?

What if your renovation was more expensive, and you weren’t able to fund it with the amount in your construction deposit account? If so, you can top it up with your own capital, or increase your mortgage. Increasing your mortgage does come with additional costs.

Tip: be realistic when estimating costs, as it’s better to estimate a higher figure than one that’s too low.

Calculating a construction deposit account for new-build properties

If you buy a new-build home, the construction deposit account works in almost exactly the same manner as the renovation of an existing home.

In the case of new-builds, the renovation contract price and the additional work are included in the construction deposit account. For the additional work (all activities that fall outside the standard building plan) you will also need to draw up a renovation specification.

Read more about mortgages for new build homes

More about building and renovations

Visit the following pages for more information about the escrow account, renovations and mortgages for new homes.

Do you have other questions about calculating your construction loan or would you like to receive advice concerning your own situation? Plan an obligation-free consultation. We’re happy to work through the details with you!

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