Published 11.06.2024

Is it worth using a home loan to buy a home in need of renovation?

Is it worth using a home loan to buy a home in need of renovation?

When browsing real estate portals, we often come across apartments or houses with a great location and layout, that are not attracting potential buyers because they need renovation. Some have outdated kitchen furniture, others have bathrooms in need of a major overhaul, and some have a style that is unacceptable to the buyer. Many home buyers in this situation just give up and move on to the next advertisement. However, according to Mari-Liis Sepp, Head of the Loan Department at Holm Bank, it is worth seriously considering such properties – buying a home that needs renovation is cheaper than buying a new one, plus you can adapt it to your taste.

“Homes in need of renovation generally cost less than completed homes. Their pool of potential buyers is smaller, as many people are not willing to take on management of a construction project on top of their day job. Yet this often means that sellers are prepared to compromise on the price, while the value of the home after renovation will be higher than the combined cost of its purchase and renovation,” explains the Holm Bank’s representative.

Renovation gives you the chance to design your home to your taste. “Adapting a home to suit you can mean a major renovation or simply a change of style – a home buyer who appreciates minimalism can transform the previous owner’s extravagant interiors to their liking. It is just a matter of visualising beyond the current appearance and having the right budget to implement your plans,” she adds.

“There are many real estate investors who make good money with this kind of business model: they buy an apartment in need of a complete overhaul and sell it at a profit when the renovation is finished,” Mari-Liis Sepp gives an example of the potential of such homes.

What will the home cost in the future?

However, getting a home loan to buy and renovate a property can be tricky, as banks usually lend a percentage of the current value of the property being bought.

“Although home loans can be used to finance not only the purchase of real estate, but also its renovation, the loan is always based on a valuation, which tells you how much the home is worth. However, the valuation assesses the current condition of the home, not its potential appearance after renovation. That is why the home buyer may feel that there is no other way to renovate the property than to spend their own savings. There are, in fact, other options to consider,” explains the Head of the Loan Department at Holm Bank.

“If the person’s borrowing power allows for a higher monthly payment, for example, they might consider additional collateral to apply for a larger amount. Once the renovation is complete, the home can be revalued. If the valuation report shows that the value of the acquired property has increased due to the renovation, it is possible to release the additional collateral, it does not have to remain for the entire loan period,” explains Mari-Liis Sepp.

The right assessment provides certainty

Holm’s representative emphasises that it is always crucial to adequately assess both your creditworthiness and the added value your home can gain during the renovation process. “In order to avoid surprises, it is worth discussing your plans openly with a loan consultant and, if necessary, immediately order an initial valuation report with two estimates: what the value of the home is today and what it would be if the planned additional works were completed,” Sepp suggests.

According to her, is certainly worth bearing in mind that amending the loan agreement and formalising changes related to the additional collateral will incur various additional costs, such as contract fees, state duties and notary fees. “It would be advisable for the home buyer to check with the bank and notary’s office how high the additional costs may be before making any decisions, and to assess whether it is reasonable and necessary to amend the contract,” stresses Holm’s representative.

An alternative: home consumer loan

If the home buyer does not have the option of additional collateral but still has sufficient payment capacity, Mari-Liis Sepp says that it is possible to take out a home consumer loan in addition to the home loan to finance the renovation works. However, she reminds us once again that no loan decision should be taken without an adequate assessment of your financial possibilities and other factors.

“Any financial commitment and the risks involved, both today and in the future, must always be very carefully considered. At the bank, we check a person’s payment capacity, but this does not mean that the person should take the decision too lightly,” says the Head of the Loan Department.

“Buying a home is a big investment, but it also has great emotional value for people. The more carefully the buyer has thought through the different possible future scenarios, the calmer the decision to buy a home can be and the more they can enjoy the result,” she adds. “It is always worth asking the bank for advice if you are in doubt or need more clarity,” Mari-Liis Sepp concludes encouragingly.

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