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Buying a home with a mortgage and renovating it

How does buying a home and renovating it affect my mortgage?

Are you going to buy a home with a mortgage that you will also have to renovate? Normally, when we refer to this case we are talking about buying a second-hand property, which in principle have a lower purchase value.

The problem is that in addition to the savings that you need to build up (remember that the bank does not usually finance more than 80% of a property's purchase value, and you will also have to add other expenses incurred through purchasing it, including notary and land registry costs as well as taxes), you will have to add the costs of renovating the property. In other words, it is an option that requires a lot of investment. In addition, when negotiating a larger amount of financing, the financial institution will assume a higher risk, so it will ask for more demanding conditions.

If you finally decide to apply for it, there is one factor that you will have to analyse well: the appraisal value. This is decisive to establish the mortgage amount, but estimating it can be complicated, since you do not know what the property will be like after renovating it. In any case, you will be able to include the value of the renovation in the appraisal as long as you have planning permission; the professional association must endorse the technical project; the renovation must include at least 50% of the refurbishment of its surface area before the renovation; the budget for the work must amount to 50% of the building's gross replacement value, excluding the value of the land.

When you have renovated the property, the appraisal value will increase, so the bank could lend you an even higher amount, but it is by no means certain that this will happen.

What if you are already paying a mortgage?

In that case you may consider extending the mortgage you have already taken out to buy your home, which will involve renegotiating the terms and conditions (known as a novation). Although it is a better option the more you have already repaid to the bank, you must take into account that you will have to assume certain costs, and also that the sum of the outstanding capital and financing the renovation may not exceed 80% of the flat's value).

A personal loan or a mortgage for home improvements

You may also be renovating a property you already own, and you are considering taking out a mortgage just to pay for the home improvements. If you are applying for a mortgage for home improvements and compared to the option of requesting a personal loan (a good option if the budget is low, as it will normally have a limit of around €30,000), a mortgage will allow you to benefit from a lower interest rate and longer terms to make the payments (starting from a minimum of ten years), and will finance around 65% of the appraisal value. Conversely, the formalities and paperwork will be longer, and the responsibility much greater.

In addition, the conditions of these mortgages are usually different to mortgages that finance purchasing a property. Moreover, this is a more atypical product that is not available at all banks.


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