What is the best way to finance renovation costs for my home (equity, mortgage increase, loan)?

The three pillars of financing: advantages and disadvantages examined.

1. Equity capital: The safest, but not always the best solution

Digging into your savings seems like the most logical way. If you have enough liquid funds in your bank account, you can use them to directly finance your renovations .

• Advantages: You pay no loan interest. You are not dependent on any bank and do not need approval or a new appraisal of your property. It is the fastest way if you want to finance renovations in the short term .
• Disadvantages: Money tied up in real estate is tied up. If you use all your savings to finance renovations , you might lack a buffer for unforeseen expenses (car breakdown, illness, job loss). Furthermore, you'll miss out on the tax deduction for mortgage interest that you would have received if you had financed the purchase with a loan.
• In conclusion: Financing renovations with equity is ideal for smaller amounts (e.g., up to 20,000 or 30,000 Swiss francs) or if your mortgage is already very high. However, be sure to keep a substantial emergency fund in your account.

2. Mortgage increase: The best way to go in Switzerland

For larger projects, increasing your mortgage is usually the most attractive option for financing renovations . Since mortgage rates are generally significantly lower than consumer loan rates, this is the "cheapest" way to finance your project. However, the bank will carefully review your application before helping you finance your renovations .

• Requirement 1 (Loan-to-value): The new total mortgage may not exceed 80% of the future market value. If your house has increased in value or you have already amortized a significant portion of the mortgage, you have some leeway here to finance renovations .
• Requirement 2 (affordability): Your income must be sufficient to cover the imputed interest (usually 5%) of the total debt.
• Advantages: Lowest interest rate. Long repayment terms. Tax deductibility of loan interest .
• Disadvantages: A complex process (re-appraisal, review). Minimum amounts are often required (many banks only increase loans above 50,000 or 100,000 Swiss francs). Additionally, fees may apply for amending the mortgage certificate.
• Conclusion: Ideal for financing large , value-enhancing renovations (extensions, complete renovations, energy-efficient upgrades).

3. Construction loans and consumer loans: The quick alternative

If the mortgage cannot be increased (e.g., due to affordability) or the amount is too small for the bank, the loan remains.

• Construction loan: A current account loan often used during the construction phase. You only pay interest on the amount actually used. After construction is complete, it is usually converted into a mortgage. This is the standard approach with major banks to flexibly finance the construction process and renovations .
• Personal loan (consumer loan): Here you borrow money without a mortgage. The interest rates are high (often 4% to 9%).
• Advantages: Quickly available. No mortgage change required.
• Disadvantages: Very expensive. This is often the least economical method for financing renovations .
• Conclusion: Only use consumer loans in absolute emergencies to finance renovations . A construction loan, on the other hand, is a technical instrument for processing the transaction, which usually ends up as a mortgage later on.

4. Pension funds: The hidden reserve

finance renovations with Pillar 3a or my pension fund ? Yes, but with limitations .

• Pledging: You pledge your pension assets to the bank. This increases your security and often allows the bank to increase the mortgage even if the 80% limit has been reached. This allows you to indirectly through preventative renovations finance .
• Early withdrawal: You take money out of your pension fund or Pillar 3a.
• Attention: This is only possible every 5 years and usually only for investments that increase value or maintain value, not for luxury items. Furthermore Do you have to make the advance payment ? tax what liquidity costs .

Strategy: Mix it up!

Often a combination makes sense. For example: You want to finance renovations worth 100,000 francs .

• You take 20,000 francs from savings (equity).
• You finance 80,000 francs by increasing your mortgage.

This way, you keep an emergency fund while taking advantage of low mortgage rates to finance the majority of your renovations . Also, check for government subsidies! If you're carrying out energy-efficient renovations, the government (through building programs) often provides financial support. This reduces the amount you need to finance yourself .

Tax trap when financing

An important aspect when planning to finance renovations :

• Value retention: You can deduct this in your tax return.
• Increase in value: You cannot deduct it from your income (but you can deduct it later from the capital gains tax).

If you increase your mortgage to finance renovations , your debt and therefore your mortgage interest will rise. You can then deduct these interest payments from your income. This often makes financing with a mortgage the more attractive option. However, if you were to finance renovations with your own funds , you would forfeit any capital gains (which are currently low) and wouldn't save on mortgage interest.

Conclusion

The question "How should I finance renovations ?" depends on your liquidity and the scope of the project. For minor cosmetic renovations, equity capital is the simplest option. However, as soon as structural work is involved (roof, heating, extensions), increasing your mortgage is almost always the most economical solution for financing renovations – provided that affordability and loan-to-value ratios are suitable.

Beware of expensive consumer loans. Instead, check if you can pledge retirement savings to offer the bank more security. Sound financial planning protects you from cash flow problems. Those who plan wisely can use low interest rates to increase the value of their home without depleting their savings.

If you are looking for support in calculating your financial options or need a neutral assessment of your affordability, Loft offers professional analysis tools for this purpose.

Glossary

• Financing renovations: The process of raising capital for renovations, usually through equity, mortgages or loans.
• Loan-to-value ratio: The ratio between the mortgage and the market value of the property. To finance renovations via a mortgage , this ratio is usually limited to a maximum of 80%.
• Affordability: The owner's financial capacity. As a rule, the calculated housing costs should not exceed one-third of gross income.
• Construction loan: A time-limited current account loan for the construction phase, which only charges interest on the amount used.
• Mortgage note: A security that serves as collateral for the bank. In order to take out a larger mortgage and thus finance renovations , this note often needs to be increased (notary fees!).