Mortgages Increasing a Mortgage
Mortgage Increase – the Financing Solution for Renovating or Modification
Renovations, modifications, or additions to living space are on the agenda for most home owners at some point or another. By adding to or increasing an existing mortgage, financing such projects is simple. The key to choosing the right financing is the type of project and the total costs.
Flexibly Financing Property Investments
Various options for financing exist based on the scope of the renovation or modification projects. Depending on the collateral value, smaller renovations can be financed by increasing the existing mortgage.
A construction loan can also be discussed for larger construction projects or modifications, such as refurbishing a facade. A construction loan can be converted to valid mortgage products at the end (consolidation) or in stages during the construction phase (partial consolidation). The existing real estate mortgage framework agreement is generally increased by the added amount.
Real Estate Valuation Provides Basis for Mortgage Increase
Before a mortgage-backed credit is increased or re-issued for renovations or modifications, the amount by which an existing mortgage debt can still be increased is determined. To do this, the value of the property after the renovation or modification is first estimated. This estimate shows the increased value in the property from the planned construction project. This yields the potential increase in mortgage debt. When added to the existing mortgage debt, this must not exceed the standard lending limit for real estate.
The affordability check is then run on the new overall mortgage, just as for the calculation for the first mortgage issued. This affordability test determines whether you will be able to cover the interest payments and repayments under the applicable conditions after the amount has been increased. The general rule of thumb for this is that your calculated housing costs (interest payments, repayments, and maintenance and ancillary costs) should not exceed one-third of your gross income.
Not All Construction Is the Same in Terms of Taxes
There are also differences under tax law for renovation and modification projects on existing real estate. Tax treatment of the project depends on whether it is a value-maintaining or value-enhancing renovation of the property.
Value-maintaining work preserves the condition of a property. It is deductible as maintenance costs for income taxes. On the other hand, value-enhancing construction increases the real estate value and is not tax-deductible. An exception to this would be investments subsidized by some cantons, e.g. energy-related changes to the structure. It is important to note that the increase in the value of the property also increases the imputed rental value.
Renovating, modifying, and expanding real estate are complex projects that require funds to be used prudently. When it comes to increasing existing mortgage obligations, careful planning and competent advice will save you both time and money.