If you want to renovate your home, you can borrow money in different ways. You can of course also pay for a renovation with your own money, but this is not always economical. If you borrow money for a renovation, you can benefit from certain tax benefits. Certain rules also apply to financing if you want to take advantage of interest deduction.
Financing a renovation
There are various options for financing a renovation. To put it very bluntly, all these options come down to borrowing money. Depending on your financial situation, you must determine which form suits you best. You can choose from the following options:
- re-record a repaid portion if the mortgage deed allows this
- increase the existing mortgage
- take out a second mortgage
- borrow money from a bank (loan or revolving credit)
- include the difference between mortgage registration and remaining debt
Advantages and disadvantages of types of financing
These forms all have their advantages and disadvantages. For the second and third forms you need a notary. These are additional costs that you do not incur with the other forms. But with these other forms you have to deal with costs from a lender. Borrowing money from a bank, for example, is also only attractive if you do not want to take too long to repay. In all cases where a mortgage is involved, the house must be appraised. These are also additional costs that you incur.
Rules for borrowing money for renovation
If you are going to borrow money for a renovation, you must meet a number of rules so that the loan can be seen as a mortgage. If the loan is classified as a mortgage, you are entitled to interest deduction. There are 3 ways in which you can finance a renovation over time:
- finance in advance
- financing afterwards
- building fund
Financing in advance
If you have taken out a loan for renovations, you may fully deduct the interest and costs of the loan up to 6 months after closing. You may also deduct the costs of the renovation in the period after 6 months, as long as you can demonstrate, with invoices, that the payments are related to the renovation.
The renovation has started. You take out a loan within 6 months after the start of the renovation. All costs you have incurred in these 6 months are deductible. Here too, the costs you incur after that period are deductible if you can prove that they are related to the renovation.
With a construction deposit you can deduct interest paid for 2 years if the renovation takes longer than 6 months. The interest received is offset against the interest paid. Make sure that you use the borrowed money for a renovation, otherwise you are no longer entitled to interest deduction. A construction account is used when significant amounts are involved. Small amounts that you borrow are often immediately deposited into your account. With a construction deposit you must submit invoices that are then paid from the deposit.
NHG and renovation
The National Mortgage Guarantee means that the Stichting Waarborgfonds Eigen Woningen guarantees the mortgage debt. Because this guarantee exists, you can get a lower interest rate on the mortgage from various lenders. The NHG can be applied for in the meantime if you need extra money for a renovation. You can apply for this for completely new financing or for additional financing. You are only entitled to NHG if the total mortgage debt + additional costs do not exceed 265,000 (2009 ceiling amount).