Home & Living

Does it Make Sense to Take out a Small Loan for Refurbishment Work?

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18.

November 2021

Regardless of whether it is a tenant-occupied apartment or your own home: Every residence needs to be fixed up from time to time so as to make sure it retains its quality of living and its property value. But what is the best way to finance the necessary measures? One option for financing extensive refurbishment work that comes to mind is to take out a small loan. Borrowing will let you get started with your home improvements right away. Then again, you need to differentiate between various types of loans, and to weigh their pros and cons.

What kind of loan is best suited for refurbishment works?

The go-to approach to small-scale refurbishment works is an instant loan. It is the quick way to borrow small amounts with much red tape. However, since instant loans are not earmarked for a specific purpose, they may be subject to significantly higher rates of interest. Among the earmarked loans, you need to distinguish between renovation loans, refurbishment loans and modernisation loans. A modernisation loan presupposes that the intended works will deliver value-added improvements, for instance by increasing the energy efficiency or by upgrading an apartment through structural alterations. The purpose of a refurbishment loan is to remedy obvious defects. This means that the intended repairs are truly necessary, thereby vindicating significantly higher loan amounts.

Renovation loans, finally, are approved for fixing up apartments that have no apparent defects. Since instant loans involve small amounts, they are more readily approved, and speed up the timeline of the intended alterations. Important to bear in mind in this context: As borrower of an earmarked loan, you are obliged to tell the lender in detail what sort of refurbishment works the loan will be used for. In return, the borrower benefits from more favourable conditions.

Conclusion

Taking out a small loan is a good idea especially when the planned renovations involve home improvements in the near future. The best way to obtain a renovation loan for moving ahead with such minor alterations is to submit a cost estimate or quote. In addition, the KfW development bank will actually sponsor certain alterations in your own property, although you should apply early on in your planning process in order to have possible allowances against your refurbishment costs approved in time.

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