You are over the moon about the new home you’ve just purchased, but adding a new bathroom would be the icing on the cake. Or, after some years, you finally want to tackle that kitchen and realise a rear extension.

The same question applies: use your savings or borrow?

We’ve outlined both the pros and cons of both options and created a helpful example calculation.

Renovating: using a construction deposit or your own capital?

Borrow (mortgage add-on)

The pros:

  • You don’t have to fund the renovation (entirely) out of your pocket.
  • Better interest rate: your mortgage is more likely to be in a lower-risk category because the market value after renovation is higher than without renovation. You may be entitled to a lower interest rate with a higher market value.
  • Will your renovation result in energy savings? If so, you can borrow up to 6% on top of the purchase price of a new home.
  • A construction deposit account is often mandatory. You will receive an interest payment on the amount you have yet to withdraw. The lender usually settles this with the mortgage interest you must pay.
  • Didn’t you need all the funds? Then you can make a downpayment on the loan. This can often be done without penalty.
  • Using a construction deposit account, you can submit invoices directly to the lender without advancing the money.
  • The interest paid is usually tax deductible.

The cons:

  • Using a construction deposit account, you can only finance property-related matters. In other words: those matters that add value to your home. In advance, you show your renovation plans in a renovation specification.
  • New homeowners often need to invest some savings because a renovation usually adds less than 100% in market value. So, for example, if you renovate for € 30,000, and the market value increases by € 20,000, you’ll still need to invest € 10,000.
  • You pay interest on any money you borrow.
  • The lender manages your construction deposit account. So you can only withdraw if you submit approved invoices for the renovation.
  • The lender will cancel a construction deposit account after some time. The duration typically is between 6 months and two years, depending on the conditions. After cancellation, the remainder is repaid on the mortgage.

Use savings

The pros:

  • There is no deadline for your renovation (as opposed to a construction deposit account).
  • You do not have to forward any invoices to your lender (as opposed to a construction deposit account).
  • No hassle with a renovation specification. You can spend your money however you wish.
  • You do not have to pay interest and repay a loan.

The cons:

  • You pay for the entire renovation out of pocket and need enough savings to cover it.
  • Some hassle to get a lower interest rate. You can only have the new market value determined after the renovation. Unlike borrowing, when an estimate of the new market value is issued before renovation.
  • No tax benefit from mortgage interest deduction.

Construction deposit account in numbers

This example helps determine your investment if you renovate your new home:

Say your new home has a market value of € 400,000, and you plan to make renovations for € 30,000. The appraisal states the estimated market value after renovation (and therefore the amount of your maximum mortgage) is € 420,000. Thus, at the time of the property transfer, the lender will transfer € 390,000 to the notary, and € 30,000 will remain in a construction deposit account.

You need € 430,000 to cover both the purchase and renovation. The mortgage is € 420,000 (maximum). This means you need to invest € 10,000 out of pocket. Note: you must deposit this amount at the notary before the transfer (in addition to the other compulsory buyer costs).