What role do mortgages play for renovations (e.g., renovation mortgages)?

Financing in focus: Mechanisms and strategies

What exactly is a renovation mortgage?

The term "renovation mortgage" suggests a separate product, but in practice it usually simply refers to increasing your existing financing. If you plan to use a mortgage increase to pay for renovations, the bank will provide you with capital based on the future value of your property.

The principle is simple: You own a house worth 1 million Swiss francs and have a mortgage of 600,000 francs. You're planning value-enhancing renovations costing 100,000 francs. The new value would theoretically be 1.1 million. The bank now checks whether you have the financial flexibility to cover the renovations by increasing your mortgage . Since the loan-to-value ratio is usually 80% (here: 880,000 francs), there would be plenty of room in this example to start the renovation project by increasing the mortgage .

How does the "increase mortgage through renovations" process work?

Wanting to increase your mortgage to pay for renovations requires some paperwork. You can't just withdraw money at the counter. The process usually goes like this:

• Create a dossier: You need plans, a building description, and cost estimates from the tradespeople. Without documentation , you ca n't proceed. mortgage increase Renovations finance .
• Re-appraisal: The bank will re-evaluate your house. They will check whether the planned renovations will actually increase its value. They will only increase the mortgage if there is a genuine increase in value , fully factoring in renovations. For purely maintenance work (e.g., a new heating system), often only the current market value is considered.
• Affordability check: Even if the house is worth a lot, your income must be sufficient. The bank calculates with a hypothetical interest rate of 5%. Only if the calculations add up will they allow you to increase the mortgage or carry out renovations.

The construction loan as an interim solution

Often, the plan to finance renovations with a mortgage is handled through a construction loan. This is a current account loan for the construction phase. The advantage: You only pay interest on the amount you've actually spent (e.g., the first down payment to the plumber). This is cheaper than immediately paying the entire mortgage and interest on money that's still in the account. After construction is complete, this construction loan is consolidated. This means the bank converts the outstanding balance into a fixed-rate mortgage. This ensures a clean and efficient process for financing renovations .

Advantages: Why increasing your mortgage through renovations is attractive

The main reason homeowners choose to increase their mortgage for renovations is the interest rate. A personal loan often costs between 4 and 9 percent interest. A mortgage, on the other hand, is often available for under 2 percent. For an investment of 100,000 Swiss francs, increasing the mortgage for renovations can therefore save thousands of francs annually in interest costs. Furthermore, there are tax advantages: the interest payments incurred when increasing the mortgage for renovations are tax-deductible. This further reduces the financial burden.

Increased risks and limitations with mortgages during renovations

Not all that glitters is gold. Those who choose to finance renovations with a mortgage increase their debt burden.

• Loan-to-value ratio: If your property has decreased in value or you already have a high mortgage (e.g. 75%), the bank may reject your application to increase the mortgage to finance renovations .
• Amortization: A higher mortgage (especially in second lien position) often requires mandatory amortization (repayment). This increases the monthly payment if you choose to increase your mortgage through renovations .
• Fees: Increasing your mortgage deed at the notary's office costs money. You need to factor in these additional costs if you plan to increase your mortgage for renovations .

Practical tips for financing

When you embark on a project to increase your mortgage through renovations , keep the following in mind:

• Inquire early: Banks need time for the appraisal. Start the mortgage increase process for renovations at least 2-3 months before construction begins.
• Review your pension fund: Is your affordability insufficient to increase the mortgage for renovations ? Pledging pension fund assets can serve as additional security and allow the bank to release the loan amount after all.
• Plan for reserves: It's better to apply for a bit more if you intend to increase the mortgage for renovations . Remodeling projects often end up costing more than planned (a buffer of 10–20%). Unused funds from the construction loan won't have to be used as a mortgage later.

Conclusion

through a mortgage increase is the preferred approach. It's the most cost-effective way to raise capital. However, it's not without its challenges. The bank will scrutinize your project as if you were buying the house from scratch.

Thorough preparation is crucial. Approaching the bank with vague ideas and asking if they can increase their mortgage for renovations will only lead to skepticism. Arriving with quotes from contractors and a clear budget, however, demonstrates competence. Use the mortgage for flexibility and ensure the total monthly payment remains manageable in the long run. This way, increasing your mortgage for renovations will become a solid foundation for a more beautiful home.

If you need support in calculating your financing options or are looking for a neutral assessment, Loft offers professional tools and analyses for this purpose.

Glossary

• Mortgage increase for renovations: The process of increasing the existing mortgage debt to pay for renovation work. This requires... most one new Market value appraisal .
• Renovation mortgage: Often used synonymously with a construction loan or an extension. It is specifically designed to finance renovations by means of a mortgage .
• Construction loan: A current account loan that is used during the construction phase and saves interest before finally increasing the mortgage and consolidating renovations.
• Loan-to-value ratio: The value of the property that the bank uses as a basis (usually 80%). It is the upper limit if you want to increase the mortgage for renovations .
• Affordability: The financial rule that housing costs (including new costs due to mortgage increases, renovations ) should not exceed one third of income.