Modernization loan: advantages and disadvantages

After all these years, install a second bathroom, bring the thermal insulation up to date, finally replace the expensive, old heating system, or expand the previously unused attic as originally planned – no problem with a modernization loan, because it doesn’t always have to be the same be expensive loan!

Inexpensive and uncomplicated

In a direct comparison to other credit products and financing options, a dedicated modernization loan is currently almost unbeatable in comparison, since cheap construction finance with effective interest rates of currently less than 3 percent are often only approved from a sum of 50,000 USD, what kind of modernization, even with cost-intensive roof modernization or Modernization of the exterior wall insulation, often completely covered. The long duration from the application to availability and payment for a smaller loan amount is simply not appropriate.

Installment loans, on the other hand, usually cover the volume of financing that is required, with an order of magnitude of $ 5,000 to $ 25,000, but the interest rates of around 7% on average are often disproportionately high in comparison to those for construction finance.

The modernization loan strikes an attractive middle ground between the loan volume and the rapid availability of an installment loan and an interest rate that is more geared towards home finance – however, modernization loans are therefore a modernization measure and require real estate property.

When is modernization worthwhile?

Before deciding on modernization, you should determine how urgent it is, whether it is worthwhile, how much the living value and the value of the property will increase – and whether it is a modernization at all! Because: too often, modernization is equated with renovation or renovation (e.g. tiling a bathroom, wallpapering the room or replacing the floor). The latter also increase the living value, but only increase the value of a property indirectly, since they only restore the original value and do not increase it.

A modernization always adds value to a property, for example through an additional bathroom, more living space through an extended attic or by reducing its energy efficiency through e.g. B. Increased thermal insulation or a better heating system / type of heating and thus reduces running costs. Measures such as investing in a photovoltaic system also count as modernization, as this increases the added value (direct income from the property).

The optimal time: ratio of residual value / new value.

With a modernization loan, the cost / benefit aspect should always play an important role: How much money do I need for the measure – and how much of it is a direct increase in value and what is just “cost”?

In order to achieve an optimal cut here, sensible, but overall expensive modernizations should B. be postponed if they do not pay for themselves sufficiently quickly. An ideal time for modernization is when a renovation or refurbishment would be necessary as an alternative – a measure would therefore be necessary anyway and there is no longer a high residual value of the old facility.

In principle, the following applies: the greater the gap between the residual value and the new value, the more rewarding modernization is from the owner’s point of view and the greater the increase in value.

Home finance or modernization loan?

A modernization loan is as mentioned above for sums of up to 50,000 USD, the first choice as a modernization loan is granted depending on the credit quality and customer relationship without the submission and examination of collateral – and much faster than a mortgage. There are usually only a few days between the application and the payment.

The loan term is also less rigid than with conventional mortgage lending: terms of less than 5 years are not uncommon, while this is the lower limit for mortgage lending. Most banks and credit institutions only insist on modernization loans

  • proof of the last 3 monthly salaries and
  • proof of self-use of the property.

An entry in the property’s land register is not necessary, which on the one hand explains the quick payment from the application to the approval and on the other hand the low interest rate, because subordinated loans, since there are often still old land register entries due to existing main financing that has not yet been repaid, interest is generally more expensive

Building finance is more suitable if the total amount is more than 50,000 USD and a payment does not necessarily have to be made promptly. In this case, you can easily secure lower interest rates than with a modernization loan. It is advantageous here if real estate financing has not yet been completed and the lender offers an increase without major additional costs – so no further rank in the land register is also occupied. However, this is really only worthwhile for an annuity loan with a lower interest rate.

Additional advantages:

In contrast to construction financing or other long-term financing models, a conventional modernization loan can usually be canceled even after 6 months without incurring prepayment penalty. Since a modernization loan is basically a earmarked, low-interest installment loan, repayment does not take place like an annuity loan with initially high, then falling monthly installments, but the installments are stable and equally high from the beginning to the end of the term.

Important: Even if fixed, monthly installments are basically an advantage because they provide planning security, this is disadvantageous in the case of an income reduction, since these cannot usually be reduced during the term.

Combine modernization loan and state subsidies

Even if building money and building loans, like the modernization loan, are cheap at the moment, modernization is often not, especially when it comes to energy-saving renovations. Although these save the most costs, since more than 77% of a building’s total expenditure is incurred for heating costs, they have not become cheaper despite the boom in demand.

But: in contrast to modernization such as loft conversions or an additional bathroom, which also increase the added value of a house, energetic renovations are particularly supported by the state – and these subsidies do not have to be repaid. In combination with a modernization loan and the use of various grants, also or especially in cooperation with the issuing bank, costs can usually be significantly reduced.

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