Increase your mortgage for renovations

Remodeling a kitchen or bathroom can get very expensive. To finance everything, you usually need a loan. Another option is to borrow extra on your mortgage for renovations. This is often cheaper than a regular loan because you pay less interest.

Is it easy to increase your mortgage?

That depends on a few things. When you took out your mortgage, did you already include financial costs for future home modifications? Then you can increase your current mortgage without requiring a notary again.

A mortgage with extra finance is called a mortgage with an increased mortgage registration.

Do you have an increased mortgage registration? Then your mortgage provider will calculate the maximum amount you may borrow. To make sure you can afford the extra monthly mortgage payments later, they look at your current income and the current value of your home. You also usually have to provide an employer's statement and a new mortgage valuation report.

Personal mortgage consultants and a new mortgage valuation report are costly. So it is usually wiser to finance minor renovations with a personal loan instead of increasing your mortgage.  

Good to know: you may borrow up to 100% of the market value of your home. Thinking of renovating to improve the energy efficiency of your home (energy-saving remodeling)? Then you may borrow up to 106% of your home value.

Don’t have an increased mortgage registration? No problem. You can still often increase your mortgage under the established conditions (such as your income and value of your home)

This requires drawing up a new mortgage deed, so you must pay notary fees. You may declare the mortgage interest on the extra mortgage loan as a tax deduction. Only if you pay off the mortgage within 30 years. 

Applying for a second mortgage is an involved process. The turnaround time takes as long as that for a new mortgage. 

A second mortgage for a home improvement is often called a renovation mortgage. However this is not a different type of mortgage, just a reason to take out a second mortgage.

When financing home renovations, you will often have a construction deposit. A construction deposit is a type of savings account that is linked to your mortgage. You pay the construction costs from this deposit. Only what you actually use for remodeling is added to your mortgage. In addition to your monthly mortgage payments, of course.

The construction deposit amount is placed in a separate account for up to 2 years. This is called the ‘construction account’. Is there any money left in the account after 2 years? Then this remaining amount will be deducted from your mortgage.

Did you finish remodeling earlier? Then you close the account yourself. You may also use a construction deposit to pay for overdue maintenance.

A construction deposit is also subject to a maximum, 100% of the value of your house after the renovation. Therefore, ensure that your mortgage valuation report includes not only the current value of your home, but also the value after renovations.

If you invest in energy-saving features, it’s possible to borrow up to a maximum of 106% of your home value after remodeling.

How much interest is paid on a construction deposit?

A construction deposit is part of your mortgage so you pay mortgage interest on it as well. On the other hand, you receive interest on the amount in your construction deposit. Therefore, if you have not withdrawn money from the construction deposit, and the interest rate is equal to what you pay in mortgage interest, the construction deposit costs you nothing. But once you withdraw money, you receive less interest than what you pay. This interest is also tax deductible.

Note that with some mortgage providers, the interest rate on the construction deposit is different from your mortgage rate (it’s 1% lower). In that case, you start paying interest right away when you open a construction deposit.

Do you currently have a mortgage with a higher interest rate, 3 or 4% for example? If so, it may be advantageous if you completely refinance your mortgage, and immediately co-finance your renovations. Mortgage rates are currently very low, which means that even with a construction deposit and additional costs such as penalty interest, your monthly expenses may still end up lower. 

Example:

Consider a €250 000 (interest-only) mortgage with 3.5% interest and €730 gross monthly mortgage payments. You want to remodel for €30 000. And you pay €10 000 in penalty interest and fees. The total mortgage amount will be €290 000. The new interest rate will be 1.50% and the new monthly mortgage payments will be €360; resulting in monthly savings of €370.

If you borrow the money for renovations or energy-efficient home improvements, under certain conditions you may deduct the interest and costs from your taxable income. You must be able to prove to the Tax Administration that you are using the money to renovate or to improve the energy-efficiency of your house. Other conditions include:

• The home for which you want to increase the mortgage is your primary residence.
• You increase your mortgage with an annuity mortgage or linear mortgage.
• You pay off your mortgage in 30 years.

Are you using the money from the mortgage increase for something else? Then the interest is not deductible.

There is actually no mortgage specifically for renovations. Renovations can simply be a reason to increase your current mortgage. It is often possible to increase your existing mortgage for renovations, but sometimes a second mortgage is taken out instead.

Wondering if refinancing your mortgage is advantageous for you? Do our refinance check or schedule a free consultation with a mortgage advisor.