26 July 2019
Renovations: mortgage or renovation loan?
Would you like to redo your bathroom or kitchen? If you don't want to touch your savings to fund these projects, you could take out a loan to finance them. But which should you choose, a mortgage or a renovation loan?
There are two possibilities: either you take out a new mortgage, or you draw on your existing one, which you have already partly paid off.
- New mortgage loan: if you need to borrow a large amount and you haven't yet mortgaged your property, you should probably choose this option. This involves significant loan agreement costs, typically 2% to 3% of the total amount borrowed. Added to that are the bank's administration fees for issuing a loan.
- Existing mortgage: if the portion already paid off is enough to cover the cost of the works, you can borrow that amount again by restructuring your existing mortgage and without having to take out a fresh mortgage. In that case you will only have to pay the bank's administration fees. You can also borrow at the current market rate, since the bank considers this a new loan even if it is incorporated into the existing one.
When can I use this?
A mortgage loan is particularly appropriate if you want to borrow amounts above €50,000. It offers a longer repayment period and very advantageous interest rates, since the real estate to which the loan applies is used as collateral. Moreover, the interest paid and the capital that has been repaid are tax deductible up to a certain amount.
The renovation loan is intended specifically to finance redesign and renovation work, upon submission of a quote or invoice. The interest rate is fixed and guaranteed for the duration of the loan. Unlike a mortgage loan, a renovation loan does not always require collateral, and does not incur administration fees or charges relating to the credit agreement.
The interest on this loan is also tax deductible under certain conditions
When can I use this?
The renovation loan allows you to borrow smaller amounts (from €2,000). The interest rate will generally be higher, although in some cases banks offer very competitive rates that can rival those of mortgage loans.
The renovation loan is also easier to apply for. The application process is very quick and can also be done online. The documents required are often easily accessible (quotes, invoices, income, proof of delivery, etc.).
And the winner is?
Choosing between a mortgage and a renovation loan depends on your situation and your needs. With a mortgage loan you can borrow larger amounts at a competitive rate and it has significant tax advantages, but it also involves considerable costs. The renovation loan is more flexible, does not always require collateral, and saves you additional costs.
To help you make your decision, 3 key elements should be taken into account.
- Is there room in your tax scheme for an additional deduction?
- How much would you like to borrow?
- Over what period would you like to repay it?