Is It Worth Buying a House Needing Renovation with a Home Loan?
When browsing real estate portals, one often encounters apartments or houses with a great location and layout, yet they remain outside the buyer's choice because they need renovation. Some have outdated kitchen furniture, others need a bathroom overhaul, and still others have a style that is unacceptable to the buyer. In such situations, many homebuyers give up investigating further and move on to the next listing. According to Mari-Liis Sepp, head of the lending department at Holm Bank, these homes should nonetheless be seriously considered.
"Homes requiring renovation are generally cheaper than ready-made homes. Their pool of potential buyers is smaller because many people are not willing to take on half-time construction project management alongside their main job. However, this can mean that sellers are willing to compromise on price to the buyer, and the value of the home after renovation will be higher than the combined cost of purchase and renovation," explains the Holm Bank representative.
Renovation provides an opportunity to design your home according to your taste. "Adapting your home to suit yourself can mean a thorough renovation, or simply a style change – a homebuyer who values minimalism can transform the previous owner's extravagant style into something suitable for them. You just need to visualize beyond today's appearance and have a suitable budget to implement your plans," she adds.
"There are many real estate investors on the market who do well with exactly this business model – they buy apartments requiring major renovation and sell them at a profit once the renovation is complete," Mari-Liis Sepp gives an example of the potential of such homes.
What will the home be worth in the future?
Obtaining a housing loan to purchase and renovate a home can prove difficult, as most banks lend up to a certain percentage of what the purchased property is worth today.
"Although it is possible to finance both property acquisition and its renovation with a housing loan, the basis for lending is always a valuation report that states how much the home is worth. However, the report assesses the home's current condition, not the vision after renovation. Because of this, homebuyers may feel that there is no other way to carry out the renovation than to use their savings. However, there are other options to consider," explains the head of Holm Bank's lending department.
"If a person's borrowing capacity allows for a larger monthly payment, one could consider, for example, setting additional collateral on the loan, which would allow for requesting a larger sum. After renovation is complete, a new valuation can be done on the home. If the valuation report shows that the value of the purchased property has increased due to the renovation, it is possible to release the additional collateral from the mortgage – it does not have to remain securing the loan for the entire loan period," explains Mari-Liis Sepp.
Proper valuation ensures certainty
Holm's representative emphasizes that it is always extremely important to adequately assess both your own borrowing capacity and the added value given to your home during renovation work. "To avoid surprises, it's worth discussing your plans openly with a loan advisor and, if necessary, ordering an initial valuation report right away with two valuations – what the home is worth today and what it would be worth if you were able to complete the planned additional work," Sepp recommends.
According to her, it is certainly worth keeping in mind that modifying the loan agreement and formalizing changes related to additional collateral require various additional costs such as contract fees, state fees, and notary fees. "It would be wise for the homebuyer to check with the bank and the notary office beforehand how large the additional costs might be, and to assess on that basis whether it is reasonable and necessary to modify the contract," emphasizes Holm's representative.
Alternative – home mini loan
If the homebuyer does not have the option of additional collateral, but their payment capacity is still sufficient, according to Mari-Liis Sepp, it is possible to take out a home mini loan in addition to the housing loan to carry out renovation work. However, she reminds again that no loan decision should be made without adequately assessing one's own financial capability or in any other careless manner.
"Any financial obligation and the associated risks, both today and looking to the future, must always be carefully considered. While we carry out a solvency check for a person at the bank, this does not mean that the person themselves should take the loan decision too lightly," says the head of the lending department.
"Buying a home is a major investment, but it has great emotional value for people. The more carefully a buyer has thought through the various possible future scenarios, the more peace of mind they can have in making the home purchase decision and enjoy it," she adds. "It's always worth asking for advice from the bank if you doubt anything or need more clarity," encourages Mari-Liis Sepp.
