Have you been wanting to change your home’s kitchen or bathroom for a while, or make your apartment more efficient? You might need help from a bank to pay for the work. In this article we explain how home renovation loans work.
Homes age over time and, besides the usual maintenance to keep them in good condition, there are times when a renovation is necessary to improve the aesthetic appearance, create new spaces, or change systems like heating and cooling, for example.
Types of renovations you can apply for a loan for
If you want to renovate your home, you may fall into one of the following three categories depending on the scale of the changes you wish to make:
- • Minor renovation. This can involve changing the flooring, doors, or windows in your home.
- • Medium-scale renovation. In this case, you might want to renovate a full bathroom or kitchen, or knock down a wall.
- • Complete renovation. These are projects that affect the entire home: removing partitions, replacing doors and windows, improving insulation, changing the flooring or HVAC systems, plumbing, among other elements.
What is considered a home renovation loan?
Home renovation loans are a type of financing granted by a bank or financial institution so that you can carry out improvements or modifications to your home.
Renovation loans usually have specific terms regarding repayment periods and interest rates, depending on the size of the project and the borrower’s creditworthiness.
Personal loan or mortgage: which is better?
If you need financing to renovate your home, you should understand the difference between a personal loan and a mortgage-backed loan. In both cases, it’s an amount of money you request from a bank for a specific purpose, but there are differences:
- • In the case of a mortgage, the property serves as collateral for the bank. That is, if you don’t repay the loan, the bank can foreclose on the mortgage and sell the property to recover the money it lent you.
- • In the case of a personal loan, the property does not serve as collateral; instead, it is based solely on your own creditworthiness. Interest rates are usually higher than those on mortgages and terms are shorter. On the other hand, origination costs are typically lower for personal loans than for mortgages.
The best option depends on each situation. That is, if you are going to undertake a major home renovation you may need more money and a longer term to repay, so a mortgage might be more suitable (you will need to consider if the property is already mortgaged and if an extension is possible). However, if the renovation is smaller you will need to look at your savings capacity and ability to pay the monthly installments of a personal loan.
Errors you should avoid
There are aspects that are essential to keep in mind before applying for the loan:
- • Do not take on more debt than you can handle. It may seem obvious, but it’s crucial to know to what extent you can incur debt considering your current income and expenses. Prepare an analysis to be clear so that the loan for your home renovation doesn’t become a problem.
- • Always read the fine print of all the documentation you sign. It’s important to read everything carefully and ask questions if you have doubts. This will prevent surprises in the future. And if you need help, seek advice from a lawyer.
What steps should you follow to apply for home renovation loans?
Each case is different, but, in general, you can follow a series of steps to apply for home renovation loans:
– Determine the type of renovation you want to undertake. It could be a mere aesthetic change or something that affects part or all of the house, as we have seen in the previous section.
– Create a budget. It’s important that you know how much money you need for the changes you want to make because, that way, you will know how much you will have to ask the bank for. Request several quotes to compare and thoroughly analyze each one to verify the total cost.
– Request multiple offers. Speak with several banks and request information and terms for the loan. It’s important that you consider not only the interest rate and repayment term, but also all other conditions that can increase the cost of the loan, such as fees and other expenses.
– Prepare the documentation you will need. Generally, the bank will require the following documents for your home renovation loan:
- • National Identity Document (DNI) of the loan applicants and of the guarantor, if the bank requests additional personal guarantee.
- • Copy of the latest payslips, employment contract, and last income tax return. They may also request a work history report.
- • If you are self-employed, they may ask for a copy of your registration in the Special Regime for Self-Employed Workers (RETA), the latest VAT returns, and the income tax return.
- • Property-related documentation:
- ◦If you are the owner: title deed.
- ◦If the property is mortgaged: information about the mortgage loan.
- ◦If you are a tenant: copy of the rental agreement.
- • Renovation-related documentation: for example, the quote you have selected for the work. It is important that the work to be carried out and the itemized and total cost are detailed. The bank will want to ensure the purpose of the money it lends.
- • Bank account number for the loan disbursement and the repayment installments.
– Bank evaluation. With all the documentation, the bank will conduct an analysis to determine if the loan is viable, if it requires any additional guarantee, or if it will be denied.
– Sending of the European Standardized Information (ESI) and the loan agreement. This is a document with all the loan conditions for the renovation and the specific offer based on your application details. Along with this document, you will receive the loan agreement.
– Signing the agreement. Finally, the loan agreement will be signed. It can be done before a notary, although it is not mandatory unless there is a mortgage guarantee. Whether executed as a private or public document, the loan agreement will include the following:
- • Place and date of execution.
- • Details of the lender (lending bank) and the borrower (debtor): full name, ID, address, power of representation for legal entities.
- • Purpose of the loan.
- • Amount borrowed.
- • Amortization and repayment term.
- • Applicable interest rates.
- • Regulations for default cases, for example, imposition of default interest in case of late payment.
- • Competent court in case of disputes between parties.
In short, home renovation loans are tools that allow you to carry out larger or more extensive works in your home. Each case is different and requires a personalized study of the needs.
