Renovation loan: comparison of favorable loans

Funding for renovations

Important for the renovation loan

  • Interest-favorable by earmarking
    The specific earmarking of the renovation loan usually leads to more favorable conditions, as with a installment loan with free use.
  • Order material yourself
    It may be cheaper if instead of the craftsman you yourself order the required material on the Internet. Under certain circumstances, this lowers the loan amount and ultimately the costs.
  • Tax deductible expenses
    The labor costs of the craftsmen can be claimed for tax purposes. Therefore, do not pay in cash, but pay on account to have the necessary evidence.

A property, whether a house or apartment, gives many people the good feeling of being financially secure – and quite rightly, because once the property has been paid off, the monthly costs of a home or a condominium sink considerably.

Completely without financial burdens, but it does not work with your own property, because over time, cosmetic repairs, which can be a bit more expensive depending on the extent. Are such measures, but the money is missing or should be used elsewhere, offers a renovation loan.

We’ll show you what to look for in a renovation loan, which makes the loan different from other loans and what alternatives there are.

What is a renovation loan?

What is a renovation loan?

A renovation loan is first of all a regular installment loan. This means that you as a borrower get paid the desired loan amount and have to repay this and the interest with the payment of fixed monthly installments.

However, in contrast to consumer credit, the renovation loan is granted almost exclusively earmarked, so you are not allowed to dispose of the money you have disbursed, but you must actually use it for the purpose set out in the loan agreement. How specifically this purpose is determined varies from bank to bank; however, it is usually only stipulated that the money must be used to renovate a particular property.

The advantage of this purpose is that the banks reward them with a lower interest rate – a renovation loan is therefore cheaper than a regular installment loan. Renovation loans are open to anyone, including tenants, for example, but usually only a real estate owner will be prepared to take out a loan to renovate an apartment or house.

Difference to the modernization

Incidentally, the renovation loan is to be distinguished from the modernization loan, even though these terms are often used interchangeably, since the purpose is similar for both types of loan. In the case of a modernization loan, however, structural changes to the property generally have to be made which result in an increase in the value of the property. Examples include the energetic renovation of a house or the cultivation of a conservatory.

In § 555b BGB, the legislature has regulated what is to be regarded as a modernization measure: It is therefore structural measures through the water, primary or final energy sustainably saved, the utility value of the property sustainably increased or new housing is created. In addition, measures that improve the general living conditions in the long term, as modernization.

However, this legal definition is particularly important for tenancies and not all banks use them for lending. It is also possible in certain cases to use a loan for both modernization and renovation. Inform yourself here but in advance exactly at the lending bank, to avoid problems later.

The process of the renovation loan

The process of the renovation loan

Before you think about terms, interest rates, and the like, be sure to identify your capital needs – as accurately as possible.

If you want to renovate a whole house, the costs are of course much higher than if you only want to repair one or two rooms in the house. Also to renovate the bathroom, associated with costs that can easily be in four or even five-digit range.

In order not to end up with too little – or too much – money, you should seek offers from craftsmen or, if you want to do the work yourself, determine the material costs exactly.

Audit by the bank

Not all credit institutions accept a simple, verbal justification when it comes to the need for a renovation. In particular, with higher loan amounts some banks check whether a renovation is actually necessary and the costs are reasonable. Evidence is usually provided by photos or an inspection of the premises and cost estimates for craft services.

Afterwards you should check different credit offers. Here you can the loan calculator or loan comparison help of FinanceScout24. Simply enter the desired loan amount and select “Modernization / Renovation” as the purpose.

Although the amount of the loan is basically open at the top, banks usually offer renovation loans up to a maximum of 50,000 or 75,000 euros. The minimum amount is usually 1,000 euros. When considering the loan amount, also note that most banks demand collateral, for example in the form of a mortgage, from a certain amount. Up to € 10,000, renovation loans are usually granted unsecured.

That a comparison of the offers is worthwhile, you will quickly recognize the interest rates that are required for each offer.

Negotiate low interest rates

Thanks to the generally low level of interest rates, you can currently get cheap loans from 2.75 to 3.00 percent, but some banks also offer renovation loans at between 8.00 and 10.99 percent.

The exact rates of interest on your loan depend on a number of factors:

  • Your credit rating
  • The loan amount
  • Possible collateral
  • The term

The term can usually be between 12 and 120 months, but is usually 24 to 84 months, depending on the amount of the loan. In exceptional cases, even longer or shorter terms are possible, but these must be negotiated specifically with the bank and also be reasonably justified.

Processing fees for private loans – which include the renovation loan – were declared inadmissible in a groundbreaking judgment of the BGH in 2014. In the meantime, the banks have adjusted to this verdict and demand no more fees for renovation loans. However, if you have already entered into a loan agreement that has incurred loan processing fees, you can reclaim these fees from the bank. However, this is only possible for contracts that have come into existence after 2011, older claims are barred by 31.12.2014.

Save on renovation costs

If you want to renovate your house, some rooms or even the bathroom and keep the costs as low as possible, you have several options:

  • Create your own hand
    The easiest way to save costs, of course, is to carry out work yourself. Thus, the costs for the craftsman, which make up the majority of the total costs for many renovations, are eliminated. However, the renovation on your own is not suitable for all work, in particular work in the bathroom you should usually leave better to the expert.
  • Procure materials yourself
    If you want to hire a craftsman, you must get several offers and compare them. In addition, it is usually cheaper to order the material itself via the Internet than to get it from the craftsman. It is best to arrange this for the first consultation and then have a list of all required materials produced.
  • Use for the tax return
    Do not forget to claim the labor costs of craftsmen in the next tax return! Therefore, make sure that the wages are shown separately on the invoice.

The use of the renovation loan

The use of the renovation loan

Since the renovation loan is normally earmarked, it may only be used for renovation work. But what exactly is renovation work? Roughly speaking, these are measures that serve to preserve the value of a property. These generally include:

  • Cosmetic repairs such as wallpapering or painting walls
  • The laying of new floors and the replacement of room doors
  • The replacement of sanitary facilities and the renovation of tiles in the bathroom

The replacement of the kitchen, however, does not count as a renovation, since the kitchen furniture is not an integral part of the apartment or the house. Whether the replacement of exterior doors and windows is considered renovation or modernization depends largely on the assessment of the bank. However, since this is a major construction measure, which is usually accompanied by an energetic refurbishment, it is generally considered more as a modernization. Proof of the appropriate use of the loan amount is usually provided by submitting the manual invoices or purchasing documents.

Funding for renovations

The bank promotes not only the construction of real estate but also the energetic refurbishment and age-appropriate modernization of private homes. However, pure renovation measures are excluded from KfW funding. In some states, however, low-interest renovation loans are offered by the state or by certain municipalities, and there are also grants for renovation work in some regions.

Alternatives to the renovation loan

Alternatives to the renovation loan

If you have decided to carry out renovations, it is also worth considering alternatives to the renovation loan. Often it is possible for craft services to settle the costs by installment over a period of time. However, as tradespeople rely on revenue to keep the business running, very few are willing to agree on installment payments that will last beyond twelve months.

Of course, you should carefully compare the offer of the craftsman with that of the bank. As tradespeople usually do not set an interest rate but require fixed monthly amounts, the total cost is best for comparison. Simply compare all installments and compare the result to the total borrowing costs you will find in the bank’s offer.

Another alternative – especially if you want to do the work yourself – is financing the material costs through a hardware store. Since the competition between the individual providers is very large, many DIY stores offer a zero-percent financing. This means that you only pay the regular purchase price in installments, you will not incur any additional costs.

This variant is of course cheaper than a loan from the bank, and therefore makes sense even when there is a lot of work to do. If you finance only the labor costs of a renovation loan and the material on the supply of the construction market, save you for a good part of the costs, the interest payments. However, you should ensure that there is no residual debt at the end of the financing.