Modernization costs and equity home financing

Hello everyone,

I have a question and hope that I can formulate it clearly.

We want to buy a house.

Purchase price: 350,000 euros
Additional costs: 35,000 euros
Modernization costs: 150,000 euros
Available equity: 235,000 euros

So we would have total costs amounting to 535,000 euros. We could contribute 235,000 euros in equity and would need a loan of 300,000 euros. Usually, the modernization costs are included in the construction financing loan, at least if they increase the value. For this, however, we would have to present a cost estimate, submit receipts, etc. (Option 1)

So far, so good. However, one bank proposed that we finance only the property purchase through the construction financing loan (with little equity) and cover the modernization measures exclusively through equity. Advantage: We would not need to submit cost estimates, invoices, etc. since we pay out of pocket.

That means:

House purchase + additional costs: 385,000 euros
Equity: 85,000 euros
Loan required: 300,000 euros
We would finance the modernization measures (independent of the loan) through our remaining equity (150,000 euros). (Option 2)

I had assumed that the interest rates in Option 2 would have to be significantly higher because we are not putting a large part of our equity into the loan but keeping it “freely available.” However, the interest rates are even better than those of Option 1 (from another bank). If this is really the case, in my opinion Option 2 would be better because it is less stressful without cost estimates, invoices, receipts, etc. Or is there some catch to this?

Many thanks in advance for your answers!

Hello, in the end it is the interest rate that decides and not the name of the product. Basically, the modernization also increases value. Sure, this way you now have flexibility. But 150k modernization will mostly also be billed, right? Have you also obtained other offers? Considered KFW funds?

Yes, most of it will be invoiced. We have also considered KfW funding, we will probably apply for a grant via KfW or BAFA, which is not yet included in the 150,000 euros. For that, we need, for example, an energy consultant, that is all clear. The difference for me would be that with option 2 we would be practically independent from the bank, as they do not necessarily want to see the invoices, etc. Or am I seeing that wrong? We are currently obtaining different offers, but no one else has suggested something like option 2 to us so far.

I know variant 2, for example, from the DB. I'm doing it like that right now as well. The expert will come by again once I'm finished.

I know variant 2, for example, from DB. I am currently doing it that way as well. The expert will come by again once I am finished.

So you have roughly clarified the planned modernization framework with the bank in advance and then pay the "variable" ongoing modernization costs yourself. As long as you and the bank's expert confirm in the end that value-retaining investments have been made in the amount of the equity, everything is fine?

This option then provides considerable flexibility. Can KfW products be integrated into this, or would that be too much of a good thing?

As long as you determine at the end with the bank's appraiser that the value-retaining investments were made in the amount of the equity capital, everything is fine?

To be honest, the appraiser comes only for formal reasons. We neither agreed on the exact type of renovation nor on an amount. It was (unusually) uncomplicated.

Can KfW products be included, or is that overdoing it?

KfW is earmarked. You only get money against the construction status.