A mortgage is often identified only with a loan for the purchase of real estate: a house, flat or plot. Few people know that a mortgage can also be granted for finishing or renovating a property. Thanks to this, potential interested parties do not have to postpone decisions for many years because of the costs that should be incurred when realizing their dreams of changing the interior of their home. They do not have to use half measures or drag on indefinitely, engaging each set aside the proverbial dollar. Thanks to its features, the mortgage allows for relatively quick obtaining of cheap and long-term financing to meet your needs.
What property can be a collateral?
A renovation loan may be a standard mortgage secured by an entry in favor of the bank in the land and mortgage register. To think about such a solution, we must be the owner of a residential property with the land and mortgage register or having the option of establishing it. If the property is already mortgaged, funds for renovation can be obtained only at the home bank. Banks do not want to hedge on “second and subsequent places in the mortgage”.
In this situation, check the possibilities offered by the bank in which we have a loan to buy real estate. If for some reason it is not possible to take out an additional loan for renovation or finishing, we can get a refinancing loan + additional funds for renovation or finishing. I described the loan refinancing procedure in the following topic on the blog: How to properly refinance a mortgage.
The scope of work and materials can be credited
Finishing mortgage is granted by banks for min. labor, changing the arrangement of rooms, painting, tiles, terracotta, floor, white assembly, changes in electrical, gas, hydraulic installations, replacement of windows but also for built-in wardrobes or kitchen furniture. Several banks have their restrictions in this matter. In several banks, min. Borrowers have the option of crediting built-in home appliances, eg fridge, dishwasher, oven, etc. Equipment that is not permanently attached to the property is not credited with a loan for renovation or finishing. The same applies to RTV, audio-video and computer equipment.
Maximum loan amount for renovation
My clients often ask me what maximum amount can be obtained for finishing or renovating a property. This is a fairly problematic issue, because you cannot answer without submitting an application. On the one hand, some banks limit it by a percentage of the property value or transaction value. The most common range is 15% -25%. On the other hand, the projected value of the property must increase in direct proportion to the value of the work performed. In short, if we apply for renovation in the amount of USD 50,000 for an apartment worth USD 300,000, the bank will grant us a loan of USD 315,000 if the forecast value of the property is assessed at min. USD 350,000.
If the loan exceeds 25-30% of the property value, a problem may arise and some banks may not want to grant such a high loan. In such cases, I suggest creating an additional, detailed cost estimate that will explain why the relatively high loan amount is due. However, this does not mean that the exceedance will be accepted. Some banks strictly apply their rules and exceptions of this type are practically out of the question.
Many borrowers believe that by means of finishing it is a simple trick to obtain funds for any purpose or to consolidate current liabilities. To some extent it is probably possible (I do not encourage because it is illegal), but rather amounts of up to several thousand USD are at stake. Otherwise, the blown estimate can only mix up the entire process.