Modernization loan: modernize and renovate the house

What is a modernization loan?

What is a modernization loan?

A modernization loan is used by property owners who want to repair, modernize or renovate their house or condominium according to energy considerations. The modernization or refurbishment loan works like a free installment loan. With the difference that the funds are earmarked: You can only use them for the purpose of modernization. In return, the interest rates are significantly lower than those of a free installment loan.

Who is the modernization loan granted to?

Who is the modernization loan granted to?

Banks only grant the modernization loan to property owners, because the property acts as security here. A land register extract usually serves as proof of ownership.

It is not a requirement that your property has already been paid off! Even those who are still burdened by construction finance can take out a renovation loan, for example for the renewal of the electrical system. What counts is personal income.

What can I finance with the modernization loan?

A modernization loan usually finances measures that add value, i.e. those that increase the value of a property in the long term. This can be a bathroom renovation, for example. But even if you replace old windows, renew the roof or change the heating system or electrical system, you increase the value of your house.

According to the German Civil Code (BGB § 555b), “modernization” includes all energetic renovation work that increases energy efficiency sustainably or reduces water consumption permanently – and even extensions such as a winter garden or a carport.

Some banks even cover renovation measures that only preserve value. But the cost of new wallpaper, cosmetic repairs or the new painting can usually still be met from the current income. However, if you want to modernize a house, you usually have to dig a lot deeper and think about a loan.

Modernize the house: Typical modernization costs

The table shows typical modernization projects that are generally accepted by banks and how much you have to budget for them. Modernization loans usually start at $ 5,000 and end at $ 50,000.

New heating system $ 5,000 to $ 20,000
Roof renovation (including energy renovation) Detached house 15,000 to 25,000 dollars
Exchange of windows / doors (approx. $ 1,000 per window / door) Single family house (8 windows) from 8,000 $
Bathroom renovation from $ 12,000
Cultivation conservatory $ 5,000 to $ 15,000

Step by step: how do I get a modernization loan?

Step by step: how do I get a modernization loan?

The bureaucratic effort is low. Because unlike for a building loan, no land register entry is necessary for the modernization loan. This saves fees and notary fees and speeds up the loan approval process. A few days after the positive Credit Bureau information, the money is usually already flowing. In the following, we will explain how to proceed:

1. Prepare a rehabilitation plan

For your own security and for submission to the bank, it is advisable to determine the costs of the modernization project in advance as precisely as possible and to lay it down in a restructuring plan. Many banks only grant the loan on the basis of such a plan. This creates transparency for both sides and prevents later discussions as to whether the funds have been used appropriately.

2. Compare the terms of modernization loans

In any case, you should compare several offers for modernization loans. Because not only do the loan conditions of the banks differ from one another, but also your individual framework conditions.

In our installment loan comparison you can get an overview online and secure top interest rates and conditions quickly and without obligation. To do this, enter the loan amount, term and purpose and compare the loan providers and their conditions.

As a guideline: At the moment the interest rate should not exceed 3-4% per year. As always, the longer the term, the higher the interest. Maturities are offered from 12 to 120 months.

3. Agree additional services with the modernization loan

Once you have decided on an offer, submit an application to the bank – and arrange additional personal services. In this context, it is important to have a special repayment right: if you have extra capital unscheduled, for example through an inheritance or a salary bonus, you can use it to pay off the loan more quickly. For these additional payments, the bank should waive to a certain extent a “prepayment penalty”. These are fees of around 10% of the loan amount that many banks without special repayment rights charge as compensation for the lost loan interest.

You should also ensure that the modernization measure ends up being more expensive than expected. Talk to the bank about the possibility of realistic refinancing. This should not drastically worsen your interest rates!

4. Payment of the modernization loan and start of construction

Once the money is in your account, you can get started. Banks handle it differently whether you are required to provide proof of the type of funds used. Some banks want to prevent you from buying an XXL flat-screen TV from the money for bathroom renovation at a low interest rate. In this case, the craftsman’s bills are sufficient as proof. If you use your own workforce for the modernization, simply collect the proof of purchase of the required material.

What are the advantages and disadvantages of the modernization loan?

What are the advantages and disadvantages of the modernization loan?

If you want to modernize or renovate your home, you can usually finance it with a modernization loan. In the following table we summarize once again what and what might contradict it.

Advantages of the modernization loan

  • A modernization loan offers cheaper interest rates than a free installment loan
  • The application and processing is unbureaucratic
  • The loan does not require a land register entry
  • Debt relief is not a requirement
  • Short terms are possible

Disadvantages of the modernization loan

  • The loan is only available to property owners
  • The loan amount is earmarked and is max. $ 50,000
  • Interest is cheaper than a free installment loan, but not as cheap as a construction loan

What are the alternatives to the modernization loan?

What are the alternatives to the modernization loan?

The modernization costs of a property can also be financed with credit models other than a modernization loan. Here it is important to consider which model is the cheapest for your own project. Below we explain three alternatives:

A free installment loan can go beyond modernization

A consumer loan has no purpose limitation. In this respect, it can also be used for modernization. The interest rate (4 – 5%) is higher than for the modernization loan. You are not accountable to the bank for this and can finance the furniture for it with just one loan to the new conservatory. You can find current conditions with our loan calculator and the credit comparison.

The transition to the renovation loan is fluid

Some banks make no distinction between renovation and modernization measures. In reality, the transitions are often fluid anyway. If the renovation loan offers the better interest, grab it. In any case, you should clearly communicate your project to the bank from the start, so as not to violate any general terms and conditions later, if the roof renovation does not fall under “renovation”.

Building finance is suitable for major modernizations

The construction finance is used to finance a construction project, but can also be used for renovation. The main advantage is the extremely low interest rates (1 – 2%). Disadvantage: A land register entry is due. This increases the application effort and ensures longer waiting times until the loan is approved. A prerequisite for a building loan is often a high equity investment, which can amount to up to 40% of the loan amount. As a rule, construction finance is only worthwhile if financing requirements exceed $ 50,000. Find out more in our mortgage comparison and use our mortgage calculator simply as a modernization loan calculator to get offers directly.

Which financing model is right for me?

If you are not yet sure which type of loan best suits your situation, our table can help you. You can see at a glance all the options and conditions on the basis of which you can make an informed decision.

  Free installment loan Murder renovation, renovation loan Mortgage lending
Who can apply for this loan? everyone Property owner Property owner
How much is the loan? $ 500 to $ 50,000 $ 5,000 to $ 50,000 from $ 50,000
Is an entry in the land register entry necessary? No No Yes
What is the interest rate pa? from 4-5% from 3-4% from 1-2%
What are the advantages and disadvantages of the financing model? free funds, but high interest rates Hardly any bureaucracy, no entry in the land register, low interest rates and short terms are possible. The approved funds are earmarked for this The cheapest interest, the highest loan amounts, but also the longest terms and the highest approval hurdles (entry in the land register, no debts, processing fees …)
What tip does give? The free installment loan is the right thing for all types of financing – except for house modernization. Interest too high! Means of choice for property owners if the loan amount does not exceed $ 50,000: best ratio between interest rate and residual conditions Second best choice for modernizers: lowest interest rates, most bureaucracy. The building loan really only pays off from sums of $ 50,000 upwards

Modernize the house and benefit from subsidies

In Germany, the state supports those who want to modernize an old building, renovate their house to make it more energy-efficient or convert it to suit their age. Different options are possible and it is worth checking in advance whether you can benefit from one or more of them in your project. There are also various regional programs depending on the state and municipality.

Renovation or modernization at low interest rates with the Lite Lender funding programs

The Lite Lender offers various, also combinable programs for low-cost loans and investment grants for measures of energetic renovation and conversion to age-appropriate living.

  • Lite Lender program 151/152/167: “Energy-efficient renovation”: for owners of real estate that was built before 1995. Individual measures of energetic renovation, the conversion to a heating system with renewable energies (loan amount up to $ 50,000 each) or the full renovation to an efficiency house (loan amount up to $ 100,000) are funded.
  • Lite Lender program 159: “Age-appropriate conversion”: for property owners who want to convert their house or condominium in an age-appropriate or burglar-proof manner.
  • Lite Lender program 270: “Renewable energies”: A solar power system quickly costs $ 5,000, plus three times the electricity storage. Lite Lender supports both the acquisition costs for both as well as the installation provided that the electricity generated is fed into the public grid.

Tax relief for the renovation of old buildings

Whoever wants to renovate a listed building is subject to the requirements of monument protection – feared because of the often considerable costs. Here, the state is helping the owner: 9% of modernization costs can be deducted from tax, and that within a period of 10 years after the property has been acquired. This applies to owner-occupied residential property. If the property is rented, 9% is deductible for 8 years and 7% for four more years.

In the case of old buildings (before 1925) without monument protection, the acquisition costs minus the land price can still be deducted at 2.5% per year. For newer properties, it is 2% per year. Timely modernization measures also fall under acquisition costs.

If you are planning to buy a property in need of modernization, you should consult your tax advisor as early as possible. If you only start extensive modernization measures 3 years after the purchase, you can write off the complete renovation costs within 1 to 5 years. However, only if the renovation costs are more than 15% of the purchase price less the property price!

Regional support programs for modernization

In many federal states and municipalities there are also regional grants for house or apartment modernization. The housing subsidies of the federal states can usually even be combined with Lite Lender subsidies. Inquire about this with an on-site energy consultant.

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