Modernization loan: Cheap to finance the maintenance

Important for the modernization loan

  • Interest-favorable by earmarking
    The concrete earmarking of the modernization loan usually leads to more favorable conditions, as with a installment loan with free use.
  • To arrange special repayments
    When making a loan choice, make sure that you have special repayments available – so in good times with an existing budget, you can repay part of the loan without incurring a prepayment penalty.
  • Tax deductible costs
    Tax savings can be achieved, above all, in the renovation of listed buildings: up to eight years after acquisition, new percentages of the costs can be claimed annually for tax purposes.

Real estate is an important element of investing in security conscious people. Whether for the family or later for old age, a home is something tangible that will last for the rest of your life. Unfortunately, it is not quite that easy because real estate needs to be maintained so that it remains habitable and does not lose value. Especially with older properties often also extensive modernization measures are required.

But: to renovate a house is associated with costs that can easily be in the five-digit range. Even smaller jobs, such as bathroom remediation, can incur costs that quickly exceed the monthly budget. For such cases there is the modernization loan.

What you have to look out for in a loan for the modernization of your property, how to find the right offer and what alternatives there are, we will tell you in the following text. First, a credit comparison is recommended.

What is a modernization loan?

Basically, a modernization loan is no different from other consumer loans : you get from the bank a certain loan amount, for which the bank demands interest. After the payment of the capital, you will repay the sum received and the accrued interest by monthly payments.

Assigned loan

However, there are some special features of the modernization loan. For example, the money is almost exclusively earmarked. For you, as a borrower, this means that you may only use the money for the purpose specified in the loan agreement – in this case, the modernization of your property.

The exact measures are usually discussed in the context of lending, but not contractually fixed. As long as you use the money for the modernization of the contracted property, you can usually freely dispose of it.

The earmarking still has a pleasant side effect: The interest on this type of loan are usually well below the interest rate level of normal installment loans.

Only for property owners

Another special feature of the modernization loan is that it is usually only given to property owners. Since tenants are in any case not entitled to make structural changes without the owner’s consent, banks often exclude them from lending. Some banks even require the owner to own the property to be modernized.

equity share

In addition, with higher loan amounts, a share of equity may be required: In this case, you have to pay part of the announced costs out of your own pocket in order to be able to finance the rest through the loan. As a rule, however, the equity ratio is no more than 20 to 30 percent. If the costs of renovating the bathroom are due to extensive construction measures, for example to 25,000 euros, you would have to pay 5,000 to 7,500 euros yourself – if the bank demands an equity share – in order to be able to take out a suitable restructuring loan.

Securing the loan is not necessary in most cases, but if the loan amounts are very high, the bank can ask for a mortgage. However, due to the mortgage, the interest rate also drops once again, so that it may be sensible to voluntarily offer the bank the protection over the property, even if additional costs result from the registration.

Advantages and disadvantages at a glance

Here are the advantages and disadvantages of the modernization loan:

advantages disadvantage
Interest-favorable by earmarking By earmarking no free disposal of the loan amount
Very flexible terms and payouts Equity ratio restricts liquidity
Possibility of mortgage security reduces interest rates Registration of the mortgage is associated with costs

Calculation, application, payment: the procedure

Before you apply for a modernization loan, it is extremely important that you accurately calculate the expected costs. On the one hand, to determine your exact capital requirements, on the other hand, most banks do not give loans without a reorganization plan.

Following you should perform a comparison of the loan deals, such as with the loan calculator. Simply enter the desired amount, select the terms and specify as the purpose of “modernization / renovation”. You will then receive an overview of the offers from which you can choose the right one.

You can usually choose a sum between 10,000 and 50,000 euros for the loan amount, but some banks also offer modernization loans up to 80,000 euros. The term can be between 12 and 120 months and should, of course, be set according to the loan amount, resulting in a monthly installment that you can safely repay. Interest rates are very different in this area – cheap offers are already available with an interest rate of 2.75 percent, but there are also banks that demand up to 10.99 percent interest on their modernization loan. Basically, however, the longer the term, the higher the interest.

Processing fees inadmissible

Processing fees for the credit are no longer permitted since a judgment of the Federal Court of Justice in 2014 and are usually no longer levied by the banks. However, if you have entered into a loan agreement since 2012 for which loan processing fees were due, you can reclaim them from the bank. In the meantime, the limitation period has elapsed for loans from previous years, so that no recovery claims are possible here.

When comparing bids, do not just look at the interest rate, because there are other criteria that are important to your decision.

In particular, the possibility of special repayment should not be ignored. Special repayments are additional payments that pay off the loan more quickly. Since the bank thus escapes interest payments, it can demand a prepayment penalty as compensation – but within a certain scope special repayments without prepayment penalty should also be possible. Here, about ten percent of the loan amount per year is usual. This way, if you have money left over, you can repay the loan more quickly and save interest without incurring other disadvantages. Make sure, however, to realistically set the special repayment rate, as the interest on loans with high special repayment possibilities will increase.

If you have decided on an offer after the settlement, you can apply for the loan directly online – however, before finalizing the loan decision, you still need to submit various documents to the bank. Which these are, varies from bank to bank, but usually include information on your financial circumstances, the nature and extent of the remedial measures and the property itself.

If the bank approves the loan, if you still have to sign the loan agreement, the loan will be paid out within a few days.

What can a modernization loan be used for?

In BGB it is determined which measures are considered as modernization measures within the meaning of the law. This includes work:

  • By the final energy consumption is lowered sustainably
  • By the water consumption is sustainably reduced
  • Through which the utility value of the property is increased sustainably
  • By the general living conditions are permanently improved
  • By the new living space is created

However, credit institutions are not bound by this definition when granting loans, and often make no distinction between maintenance and modernization measures. However, as modernization loans are earmarked, it is important that you discuss the measures you should take with your bank beforehand, as improper use of the loan amount can quickly lead to problems with the lender. In general, however, all structural measures that aim to increase the value of the property, as a modernization.

Here is a list of measures that are commonly recognized by all banks and the costs typically incurred.

measure Cost (approximately)
Replacement of the heating system 5,000 to 20,000 euros
Rehabilitation of the roof, including energetic renovation Detached house – 15,000 to 25,000 euros
Replacing the windows Detached house, 8 windows – 5,000 euros
Exterior insulation of the facade Detached house – 15,000 to 25,000 euros
Renovation of the bathroom 5,000 to 15,000 euros
Cultivation of a conservatory 5,000 to 15,000 euros
Renovation of the terrace 1,500 to 7,500 euros

Since the loan is earmarked for the modernization of your property, you must provide the bank with proof that you have used the money paid out for your purpose. In general, it is sufficient here, if you forward the corresponding invoices of the commissioned craft businesses as a copy to your bank.

If you do some work yourself and want to finance the material you need through the loan, just submit the appropriate proof of purchase.

Tax special feature in the renovation of old buildings

A refurbishment involves costs that are usually well above the cost of refurbishing a more modern house. This is especially true for real estate that is a listed building, since here the building fabric must be preserved and the owner may not just make arbitrary structural changes.

The legislature has also taken account of the higher capital requirements arising from the renovation of listed buildings. Thus, investors can claim maintenance and modernization costs for the first eight years after acquisition for each of nine percent tax. In the following four years, seven percent of the renovation costs can be deducted from the tax once a year. If the property itself is used, nine percent of the modernization costs can be reported to the tax office for ten years.

However, this tax regulation only applies to properties that are listed as historical monuments. In “normal” old buildings (built before 1925), it is only possible to deduct the cost of 2.5 percent per year – for newer properties here only two percent per year are allowed.

The modernization loan in Germany

The Financedel credit study gave us an insight into the entire credit landscape in Germany. Of the 3,000 loan applications examined in the study, a total of 19 percent fell on the modernization loan. With an average of 18,666 euros, the Saxons are the front runners in the acceptance of modernization loans. They use the highest loan to modernize their property. In second place followed Hesse with 17,595 euros and third place Schleswig-Holstein with 16,714 euros. The lowest amounts of credit for modernization are recorded in Saarland (7,666 euros), in Lower Saxony (8,948 euros) and in Mecklenburg-Vorpommern (9,050 euros).

The credit study has shown that the average loan amount for the modernization loan is 12,605 euros. With a gender distinction of the loan amount it is noticeable that men with 13,700 euros on average receive higher lending for modernization than women (10,000 euros).

In addition, the following statement must be made: The more people living in a household, the higher the amount of the modernization loan taken. A 5-person household finances modernization measures with an average of 17,335 euros almost double the budget compared to 1-person households (8,702 euros). However, this is not surprising, considering that five people need more living space than singles.

Alternatives to the modernization loan

Alternatives to the modernization loan

While the modernization loan is in many ways tailored to the needs of builders looking to rehabilitate their properties, it may be better to choose a different type of loan. You can choose from:

  • installment loan
    Installment credit is a regular consumer loan without earmarking. The interest here is usually higher than the modernization loan, but you can also freely dispose of the loan amount. So, for example, if you’re planning modernization, renovations, and buying new furniture, you can finance all of that through a loan rather than having to sign up to three different loan agreements, which in the worst case are not even cheaper than installment credit.
  • renovation loan
    The renovation loan is similar to the modernization loan, but is earmarked for maintenance work. As the transition between modernization and renovation is sometimes fluid, the renovation loan can be an alternative if you find a cheaper deal. In this case, clarify the measures in advance with your bank, in order to avoid later problems.
  • Construction Financing
    The construction financing is actually – as the name implies – the financing of construction projects, but it can also be used for renovation work. The equity ratio here is usually quite high – up to 40 percent are common – in addition, the mortgage lending is usually secured by a mortgage, but the interest here are also particularly favorable. Especially with very extensive renovation measures, mortgage lending can therefore be an attractive alternative to the modernization loan.
  • Intrasavings bank loan
    The Kreditanstalt für Wiederaufbau (Reconstruction Loan Corporation) is a public-sector development bank which, in addition to the construction of houses, also promotes the energy-efficient and age-appropriate refurbishment of real estate. The following conditions apply to the Intrasavings bank loan for refurbishment according to energy-related criteria:
  • Maximum loan amount: 75,000 euros, 50,000 euros for individual measures
  • Interest rate: 0.75 percent
  • Duration: 4 to 30 years
  • Fixed interest: 10 years
  • Amortization subsidy for efficiency houses: Up to 16,875 euros

For age-appropriate refurbishment, the following conditions apply to a loan from Intrasavings bank:

  • Maximum loan amount: 50,000 euros
  • Interest rate: 0.75 percent
  • Duration: 4 to 30 years
  • Fixed interest: 5 to 10 years

As you can see, the conditions for Intrasavings bank funding are very favorable, so if you meet the eligibility requirements, you should always prefer this loan to a regular modernization loan.

  • Pre-financing loan with home savings contract
    The pre-financing loan in combination with a home savings loan can also be a cheap alternative to the modernization loan. If you have a Bauspar contract that is not yet ready for rendition, you can arrange an early payment of the Bauspar sum with a pre-financing loan with the bank. It then only the interest on the loan, and you continue to pay in the Bauspar contract. If the contract is ready for assignment, the loan is automatically repaid with the home savings amount. As banks assess the risk of default here as very low, interest rates are correspondingly low – currently one to two percent are normal.

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