Is taking out a loan for renovation worthwhile?

Hello forum,

I am considering renovating my house and am wondering if it is worth taking out a loan for it. The renovation costs could be quite high, and I am wondering if it makes sense to finance this investment. Sometimes you hear that an energy-efficient renovation can increase the value of the property and save energy costs in the long run. However, I am unsure if that is really enough to justify the loan costs. Have you already had experience with loans for renovating your houses or apartments? What are the most important factors to consider? Would you advise me to take such a step?

Hello forum,

I am considering renovating my house and am wondering whether it is worth taking out a loan for it. The renovation costs could be quite high, and I am wondering if it makes sense to finance this investment. Sometimes you hear that an energy-efficient renovation can increase the value of the property and save energy costs in the long term. However, I am unsure whether that is really enough to justify the cost of the loan. Have you already had experience with loans for renovating your houses or apartments? What are the most important factors to consider? Would you recommend such a step to me?

You can answer this question calmly with "It depends." It depends on
- what is to be done
- location of the house
- general condition of the house
- renovation for energy efficiency, to otherwise upgrade the house, or because the place is simply worn down
- current energy consumption compared to future consumption
- costs of the renovation
- loan amount, interest, and repayment
- whether own capital is available as an alternative
- alternative investment interest rate for own capital, if it exists but is not to be used

In general, however, it can be said that houses with poor energy performance have lost a lot of value and, in my opinion, will never recover that loss due to continuously rising energy prices. Properties at current standards have lost little value, and their prices are now rising again.

And finally, please don't look only at the financial aspect. Ownership is financially bad per se. But the quality of life that ownership brings me cannot really be measured with money. And when I now feel how the cold 1960s walls or the partially single-pane glazing have transformed into nice warm surfaces after façade insulation and new windows, then I have to say: "Yes, it has definitely been worth it." And when I then see heating costs reduced by about 60-65% (based on current oil prices and electricity prices), then it’s also financially enjoyable.

Just calculate it for yourself? You (hopefully) know your current heating costs. A new build or fully renovated old building should be around 50 kW/m²/a, or even lower. That way you can calculate how much you save on heating costs per year.

100m² at (absolutely usual for existing buildings) 180 kWh/m²/a is 18,000 kWh of heat demand per year. With my gas provider, that would currently be 158 EUR/month, so 1,896 EUR per year.

Now you renovate to 50 kWh/m²/a and your consumption drops to 5,000 kWh per year, meaning 55 EUR/month, 660 EUR per year. Savings -1,236 EUR.

In 20 years, you save 30,000 EUR.

If you now borrow 100,000 EUR at 4% and pay it back in 15 years (repayment 4.8%, monthly rate 739 EUR), in the end you will have paid 33,000 EUR in interest alone. If you pay it back over 20 years, you have a rate of 605 EUR and end up paying 45,000 EUR in interest...

So no. Purely economically, it’s not worth it at all. Unless you intend to sell the house in the very near future. Because how prices will develop for poorly insulated properties in 5 or 10 years, no one knows.

PS:
It would have been worth it when interest rates were still low, prices had not exploded, and energy was still cheap. But only if you take today’s energy prices for the calculation. With the energy prices of 2019, energy-efficient renovations would not have paid off even in 50 years... that's why hardly anyone did it back then.

You can also calculate it if the horror scenario occurs and the gas price shoots up to 15 cents/kWh from 2027 due to the changed CO2 pricing. This corresponds roughly to a CO2 price of 250 EUR, as assumed in the worst case.

Then your savings increase to 1,854 EUR per year. You save 37,000 EUR in 20 years. Still less than the interest for a 100,000 EUR loan alone...

So no. Economically, it simply isn’t worthwhile. Unless you plan to sell the house in the very near future. Because no one knows how prices for poorly insulated properties will develop in 5 or 10 years.

In terms of investment and savings, no. But you are not considering the property value. Energetically unrenovated houses in B/C cities have lost about 30% of their value since the interest rate/energy price increase, while renovated properties (energy efficiency classes A/B) have remained more or less price-stable.
And nobody in the banking/real estate industry believes that suddenly, in 5 years, poor properties will be especially in demand with continuously rising energy costs.

If you had your 400k property (value in 2020) with poor efficiency on the market today, you would have lost 100k or more (and you will not recoup that in the foreseeable future). If you had renovated it in 2020 for 100k, you would be back to break-even today – and at the same time have reduced energy costs.
This also means that if you renovate today, you should not only calculate the energy cost savings but can also directly expect a significant increase in value.

By the way, just as a side note: starting next year, we will no longer finance properties with really poor energy efficiency (unless a renovation takes place alongside the purchase). A practical example of how the market is already developing.

Btw, just so you know: starting next year, we will no longer finance properties with really poor energy efficiency (unless a renovation takes place alongside the purchase). A practical example of how the market is already developing.

What is the rationale behind this? Do you as banks now have to disclose how many loans you grant to energy-efficient buildings? Or are you afraid that energy prices will rise so much that the default risk of the property increases? Until now, no one cared, as long as the money flowed. Due to ESG criteria in the stock market, driven by Blackrock and others, this is gradually becoming dominant.

and the gas price shoots up to 15 cents/kWh from 2027 due to the changed CO2 pricing

In the basic supply from our municipal utilities, the gas price was 12.66 ct gross (plus basic fee) from January to March and has been 14.08 ct gross since April. It’s not that far off even now...