You are over the moon about the new home you’ve just purchased, but adding a rear extension would really be the icing on the cake. Are you looking to finance the building work with a construction deposit account, or by entirely using your own savings? Or, do you want to increase the mortgage of your current home with a construction deposit account because you’re looking to carry out renovations? We’ve outlined both the advantages and disadvantages of renovating with a construction deposit account and your own money in the list below, as well as providing a handy calculation example.

Renovating: using a construction deposit or your own capital?

Renovating with a construction deposit account instead of your own money

The advantages:

  • You don’t have to fund the renovation entirely out of your own pocket
  • Your mortgage is more likely to be in a lower risk category, because the market value after renovation is higher than the value without any renovation work. With a higher market value, you may be entitled to an interest rate cut.
  • Will your renovation plans result in energy savings? If so, you can borrow up to 6% on top of the purchase price of a new home.
  • You will receive an interest payment on the amount that you have not yet withdrawn. The lender usually settles this with the mortgage interest you’re obliged to pay.
  • Have you ultimately taken out only some of the total amount in your construction deposit account? If so, you can use it for repayments on the amount on your mortgage. This can often be done without incurring a surcharge.
  • You can submit any invoices directly to the lender.

The cons:

  • You can only finance property-related matters through a construction deposit account; in other words: solely those matters that are attached to your house. Make it known in advance what your renovation plans are, and enter them in a renovation specification.
  • You’ll often still need to use your own capital, because a renovation does not usually add 100% in value. An example: if you renovate for € 30,000, and the market value increases by € 20,000, you’ll still need € 10,000 of your own money.
  • You pay interest on any money you borrow.
  • The lender manages your construction deposit account. So you can only withdraw the money if you submit invoices for the renovation.
  • You should usually use your construction deposit account within 6 months to 2 years. The exact length of time depends on the conditions set by the lender.

Renovating with your own money instead of a construction deposit account

Advantages:

  • There is no deadline for your renovation fund.
  • You do not have to pay interest and repayment on a new loan.
  • You do not have to send any invoices to your lender.

Disadvantages:

  • You pay for the entire renovation out of your own pocket, so you’ll need enough savings to cover it.
  • The lender will work with the market value figure for renovation work. As a result, you are less likely to end up in a lower risk category, and you are therefore less likely to benefit from a lower interest rate on your mortgage (you can, however, have a revaluation conducted on your home after the renovation work is finished, and can often still have the mortgage interest rate adjusted).
  • Are you using your equity on the property to pay for the renovation? If so, make sure that your administration is in order, in connection with the Bijleenregeling (mortgage top-up limit).

A calculation example

Let’s suppose you buy a house at € 400,000 (this is also the market value for renovation).

You are planning on carrying out renovation work, and, according to your renovation specification, the total cost will be about € 50,000.

You also have € 50,000 available (in addition to the property’s purchase-related costs) to pay for the renovation yourself as an option.

The following are the scenarios with and without a construction deposit account:

  • For renovations with a construction deposit account:

According to the appraiser, your home is worth an added € 35,000 after its renovation (70% of the renovation costs). You can finance this amount in your construction deposit account. You then pay the remaining € 15,000 directly out of your own pocket.

After the renovation work, your lender will therefore assume a market value of € 435,000.

You also have € 50,000 available yourself – € 15,000 that you’ll still need to transfer into the construction deposit account = € 35,000.

Your mortgage is then: € 435,000 (market value after renovation) minus € 35,000 (own capital) = € 400,000. This represents a 92% loan of the property’s market value

Because the market value after renovation is higher than the purchase price of the home, the lender can reduce the risk category of your mortgage. This might also entitle you to an interest rate reduction.

  • For renovations without a construction deposit account:

You are paying the costs of the renovation entirely from your own capital.

Your mortgage is: € 400,000. This figure represents 100% of the market value.

After the renovation, your lender will still work with the purchase value of your home, in other words, not the post-renovation market value. As a result, your mortgage will remain in the same risk category, which means you won’t be entitled to an interest rate reduction.

Would you like some obligation-free advice on your own situation? We are happy to talk through your plans about the extension you’re looking to have done, or that full bathroom makeover. Schedule a consultation with us, without further obligation.