The trend of investing in real estate in Germany has been on the rise for many years. Especially in major cities such as Munich, Berlin, or Cologne, many citizens are striving to acquire their own property or apartment, which they can then rent out at good prices or use for their own needs. Owning a home is a tangible asset that usually lasts a lifetime. However, it is not as simple as described above because properties need to be well-maintained. In the case of older apartments, frequent modernisation measures are often necessary, which can often only be financed with a modernisation loan.
Renovating a house almost always comes with costs that can easily exceed five figures. Even small renovation measures such as a bathroom renovation can be quite costly. These costs quickly exceed the monthly budget of the average citizen. For such cases, there is a modernisation loan. This form of financing helps make necessary investments without having to empty the entire bank account.
However, not all loans are the same and there are certain pitfalls that borrowers should avoid when taking out a loan. Therefore, the following guide provides detailed information on what a modernisation loan is, how it works, and what it can be used for. It presents valid alternatives and provides a step-by-step guide on how to apply for the desired loan in just a few minutes. To be well-informed before taking out a loan, it is important to read the following paragraphs carefully.
What is a Modernisation Loan and How Does it Work?
In principle, a modernisation loan is not much different from other consumer loans, such as a traditional installment loan. The principle is the same: borrowers receive a certain loan amount from the bank, for which the bank charges a certain interest rate. After the capital has been disbursed, the borrower repays the money in monthly installments, consisting of a repayment component and an interest component.
However, a modernisation loan has a peculiarity: it is usually a purpose-bound loan. This is neither good nor bad, it is simply a fact. For borrowers, this means that they can only use the disbursed money for the purpose they have defined in the loan agreement with the financial institution. In this case, the purpose is the modernisation or renovation of the property. The capital cannot be used, for example, to buy a car.
However, borrowers do not have to write down all the measures to be carried out in the contract. As long as borrowers use the money within the scope of the modernisation measures, they are free to use it and rarely have problems with the bank.
Special Features and Characteristics of Modernisation Loans
This purpose limitation, which brings interest advantages depending on the creditworthiness, is just one of the peculiarities of a modernisation loan. There are three other essential characteristics of this type of loan:
Only for property owners: In most cases, a modernisation loan is only granted to property owners. Tenants are usually not eligible, unless they have the explicit consent of the owner to make structural changes to the property. Some banks even require that the owner himself/herself occupies the property in question.
The equity component: Especially for higher loan amounts, an equity component is often required. In this case, borrowers have to contribute a part of the costs from their own pocket in order to take out the loan. Usually, this share amounts to around 20% of the total costs.
No mortgage registration: However, a mortgage registration is usually not required as collateral for the loan, except for really high loan amounts. On the one hand, this is an advantage, but on the other hand, borrowers do not benefit from further declining interest rates, which they only receive with a genuine mortgage-based financing.
Why is Modernisation Worthwhile?
Anyone who has ever gone through a renovation or modernisation process knows the stress that can come with it. The measures are expensive and often take longer than anticipated. With this knowledge, some property owners in Germany wonder whether they should even start the whole process. However, even if it sometimes requires some effort, there are very good reasons for modernising the property, especially these three:
Save on energy costs: An energy-efficient renovation has many positive effects on energy costs. Either property owners benefit from this as residents of the apartment themselves, or they can look forward to a higher resale value, as the useful life of the property is extended. They also contribute to environmental protection and live more sustainably overall.
Increase the value of the property through a new heating system and other renovations: Those who already have in mind to sell the property one day should know that nothing increases the value of an property as much as modernisation/renovation. Whether it’s a bathroom renovation or a better heating system, all of these significantly increase the value of the property.
Obligation for landlords: This point is only relevant for property owners who rent out their property. In this case, they must ensure that a certain minimum standard is maintained in the apartments, as otherwise the usability is not legally given. Usually, this concerns minor repairs, as tenants cannot demand major modernisation. Due to the latest energy saving regulations, it may also be necessary to carry out certain energy-efficient renovation measures in order to comply with the law.
What Can a Modernisation Loan Be Used For?
This question can be answered clearly as this aspect is legally regulated, namely by Section § 555b of the German Civil Code. This section specifies what measures qualify as modernisation measures under the law. These include:
- Measures that significantly reduce water consumption
- Measures that sustainably reduce energy consumption
- Measures that create new living space
- Measures that significantly increase the utility value of the property
- Measures that permanently improve general living conditions
However, credit institutions are not bound by these requirements when granting modernisation loans. Often, banks do not differentiate between maintenance and modernisation measures. However, a modernisation loan is always purpose-bound, so borrowers should definitely discuss the measures they are planning to take with the bank in advance. The misuse of the loan amount can quickly lead to problems that could have been avoided with better communication.
Below is a list of the most common measures covered in the modernisation loan comparison, which are usually accepted by all banks:
- Energy-efficient renovations, such as insulation measures
- Modernization and replacement of windows and doors
- Upgrading heating systems and installations
- Bathroom renovations
- Electrical upgrades and installations
- Roof repairs and renovations
- Balcony and terrace renovations and extensions
Modernisation Loan Comparison: The Key Pros and Cons
A modernisation loan is always purpose-bound, so borrowers must always provide proof to the bank that the capital has been used for its intended purpose. Usually, it is sufficient to submit invoices from craftsmen that clearly confirm the measures taken. If the work is carried out by the borrower themselves, they should keep the purchase receipts from the hardware store. This is just a small addition to the previous paragraph.
Now that we know what a modernisation loan is, both in general and in the legal sense, the most important advantages and disadvantages of such a loan in the modernisation loan comparison are summarized below:
Advantages:
- Purpose-bound loan specifically designed for modernisation
- Favorable interest rates due to the purpose limitation
- Possibility of deducting interest and loan costs from taxes
- Flexible loan terms and repayment options
- Possible government subsidization through KfW promotional programs
Disadvantages:
- Limited use of funds only for modernisation purposes
- Requirements for property ownership and limits on rental property
- Possibility of additional costs for notary fees or other related expenses
Achieving Your Goal in Just a Few Steps with the Modernisation Loan Calculator
After clarifying the advantages of taking out a modernisation loan, it is now time to explain how to obtain the loan. Ultimately, there are two options: applicants can either go to their local bank and inquire about a modernisation loan there, or they can use the modernisation loan comparison to find the desired loan. Before taking out a loan, applicants should definitely compare offers from different banks. This can be best done through an online comparison. This way, applicants can see at a glance which bank offers the best deal and do not have to rush to different banks after work for several days to obtain loan offers.
At this point, let’s explain in a few steps how the modernisation loan calculator can be optimally used to find the best personal loan offer based on individual needs.
Step 1: Create a Renovation Plan
For two reasons, it is recommended to create a renovation plan as the first step. Firstly, borrowers will have more confidence when they calculate the exact costs of the project, and secondly, they often have to submit such a plan to the bank before they can take out a loan. A renovation plan creates transparency on both sides and prevents unnecessary discussions later on about whether this or that purchase is covered by the cost plan. In short, it saves a lot of nerves.
Step 2: Compare Conditions
Only after that should borrowers compare the conditions of different offers. The modernisation loan calculator is best used to get a unique market overview. To do this, borrowers simply enter the basic data such as the desired term, loan amount, and purpose in the calculator. Applicants will then be directed to an overview page with various offers, where they can compare the proposals, focusing primarily on the effective interest rate.
Step 3: Submit Loan Application
Once borrowers have chosen an offer, they can first make an informal inquiry and then submit a loan application. After an initial examination by the bank, borrowers only need to authenticate themselves to the bank. There are two options available for this:
- PostIdent procedure: Borrowers go to the nearest branch of Deutsche Post with the completed PostIdent form and their ID card. A representative of the bank will authenticate the person on behalf of the bank.
- VideoIdent procedure: Borrowers have a video call with a bank employee. In addition to the ID card, a webcam, a telephony software such as “Skype”, and a stable internet connection are required.
Afterwards, the money will be paid into the specified account within a few days after further examination by the bank, and borrowers can start with their project. With that, the process is successfully completed.
Good Alternatives to Modernisation Loans
The modernisation loan is perfectly tailored to the needs of builders who want to renovate their properties. However, sometimes, especially for very high loan amounts, it may be more cost-effective to opt for an alternative type of loan. The following options are available:
Bau-Finanzierung (Construction Financing): Although the name suggests otherwise, construction financing is actually intended for financing entire construction projects, but it can theoretically also be used for renovation projects. The equity component, averaging 40%, is high for this type of loan, and a mortgage is usually registered as collateral. However, the interest rates for construction financing are still unbeatably low. Therefore, in the case of extensive and therefore expensive modernisation measures, construction financing can be a suitable alternative.
Ratenkredit (Installment Loan): This is a classic consumer loan without a specific purpose. The interest rates are higher than for a modernisation loan, but borrowers can use the capital freely. If in addition to the basic renovation measures, borrowers are planning to make additional purchases such as furniture or similar items, all of this can be financed with an installment loan instead of having to deal with three loans simultaneously.
Renovierungskredit (Renovation Loan): A renovation loan is similar to a modernisation loan but is usually intended for specific maintenance work. The transition is often fluid, which is why a favorable renovation loan can be a good alternative. However, in this case, borrowers should definitely discuss all measures in advance with the bank to avoid misunderstandings later on.
KfW-Kredit (KfW Loan): The Kreditanstalt für Wiederaufbau (KfW) is a state-owned development bank that promotes not only the construction of houses but also the energy-efficient or age-appropriate renovation of existing properties. The terms and conditions are very attractive, which is why borrowers should definitely consider a KfW loan if they meet the requirements.
Which Financing Model is Most Suitable?
If you are still unsure which of these loan options is best for you, the following table may help. It presents all the options and conditions, allowing customers to make an informed decision based on this information.
FAQ: The most important questions answered briefly and compactly
For all other questions and topics that have not been covered in the guide, there is this FAQ section. Here, short and compact answers to the most important questions are provided.
Q: Who can receive a modernisation loan?
Most banks only grant a modernisation loan to homeowners. Some institutions also require that the property is owner-occupied, not rented out. The standard requirements for a personal loan in Germany also apply: adulthood, permanent residence in Germany, an account with a German bank, regular and sufficient income, and sufficient creditworthiness (no negative SCHUFA entries).
Q: What can a modernisation loan be used for?
A modernisation loan is a purpose-bound loan. This means that borrowers can only use the capital for the purpose specified in the contract, which in this case is measures for the modernisation of the property. The exact scope of the measures has been explained in detail above in the guide.
Q: What else should be considered before taking out a loan? Details about cost estimates and more.
Those who want to take out a modernisation loan should plan exactly how much money they need. Therefore, it is important to create a renovation plan and inform yourself in advance about the costs that will be or could be incurred for the planned modernisation. Borrowers are best advised to obtain a cost estimate from the selected construction company.
Q: When is it advisable to use KfW funding?
With a modernisation loan, borrowers can choose between financing from a private bank through the modernisation loan comparison and government funding from a KfW bank. With a KfW bank loan, borrowers usually get more favorable conditions, but its approval is subject to strict conditions. However, those planning to carry out energy-efficient or age-appropriate renovation measures often receive approval. Other measures, on the other hand, do not qualify for funding.
Q: What documents are required to assess creditworthiness?
Many lenders assess the creditworthiness of borrowers as it often affects the interest rate. Usually, lenders require bank statements as proof. Instead of bank statements, income statements or pension statements can also serve as evidence.
Q: Can the conversion or replacement of windows be financed with the loan?
The conversion or replacement of windows can generally be easily financed with a modernisation loan. New windows improve the thermal insulation of the house, making them a modernisation measure, and most lenders cover the costs of modernisation for the conversion.
Q: What is the maximum prepayment penalty?
For a loan term of more than 12 months, the prepayment penalty can be a maximum of 1% of the remaining loan amount. If the term is less than 12 months, the bank can charge a maximum of 0.5%.
Q: Which providers allow loan disbursal?
The loan calculator lists numerous financial institutions that offer residential loans, real estate loans, or renovation loans. To finance the modernisation costs with a modernisation loan, it is worthwhile to carefully review the different requirements of the lenders, such as Targobank. Are individual measures required, such as the registration of a mortgage for the loan guarantee? What requirements must borrowers meet to finance the preservation of value of the property and improve the building structure? Not only the interest rates should be the focus when choosing a suitable provider.
Q: How are the conditions of a modernisation loan determined?
When looking for a provider to finance modernisation costs, borrowers usually start by looking at the interest rate. However, it is important not to choose the first low-interest offer right away. In addition to the nominal interest rates, which accrue on a monthly basis, the effective annual interest rate plays a major role as it includes other loan costs. The borrower’s creditworthiness generally influences the interest rate, unless it is a non-creditworthiness-dependent loan. It is also important to pay attention to whether there will be a remaining debt after the loan term or if the loan will be fully repaid. Additional costs, such as for residual debt insurance, may be included in the effective interest rate.
Q: How are the loan installments calculated?
The amount of the loan installments for a modernisation loan depends on several factors. Once borrowers have calculated the financing requirements and determined the loan amount, they can estimate the monthly installments based on the length of the term. Borrowers should make sure that all costs are included in the loan amount, as additional financial burdens may arise in addition to the basic modernisation costs. With equal installments, borrowers will be debt-free after the end of the term. Those who want to repay the loan quickly should opt for a short term, but they should consider that the installments will be higher, resulting in a greater financial burden. In this case, it may be helpful to negotiate special repayments or installment breaks in order to have as much flexibility as possible when repaying the loan. With a loan calculator, it is easy to calculate the monthly amount and the duration until the loan is fully paid off.
Please note that this article is for informative purposes only and does not constitute financial advice. Borrowers should consult with a financial professional before making any financial decisions.
