Personal loan or mortgage: what is better to finance a sustainable reform?

The Government of Spain has a public aid plan to subsidize the energy improvement of homes through renovations.

24 June 2022 Friday 15:11
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Personal loan or mortgage: what is better to finance a sustainable reform?

The Government of Spain has a public aid plan to subsidize the energy improvement of homes through renovations. But to access this program it is necessary to go through an important bureaucratic labyrinth: you have to apply for the subsidy through the corresponding regional administration, present mountains of documents to demonstrate that the requirements are met, wait a long time to find out if the aid is granted or not... And if approval is obtained, the aid only serves to cover 40% of the price of the works, with a maximum amount of 12,000 euros.

Given the difficulties of accessing these subsidies and their low amount, it is not surprising that many people prefer to obtain the money through a bank loan. But how can the cost of a reform be financed through a bank? According to the banking comparator, there are two options: with a mortgage or with a personal loan. Since each product has its pros and cons, it will be necessary to analyze its characteristics well to decide which of them is more convenient. Of course, whatever the credit chosen, it is advisable not to postpone contracting: the rate hike announced by the European Central Bank for the end of July will fully affect the price of these financial products, which will inevitably make the final budget of the reform.

Let's start with the first option. The operation of a mortgage is simple: you go to the bank, the house to be reformed is mortgaged and the borrowed money is used to pay the cost of the works. The main advantage of mortgage loans is that they are cheap, since their interest rarely exceeds 2% or 3%. In addition, as they can be repaid over a long period (between 20 and 30 years), their installments are affordable.

However, banks do not usually grant mortgages to finance reforms of low amount. In general, this product can only be used if the price of the works exceeds 30,000 or 50,000 euros, depending on the entity you go to. It should also be borne in mind that there are banks that prefer not to grant their mortgages for reforms and that they only offer them to people who want to buy a home.

One of the entities that do accept to mortgage homes to reform them is Banco Mediolanum. Your Freedom Mortgage, which can be requested for this purpose, allows you to obtain an equivalent to 80% of the value of the house, with a repayment period of up to 30 years. Your interest is from Euribor plus 0.99% (1.50% fixed the first year), in exchange for direct depositing your salary and taking out your life insurance, and includes a 1% opening commission.

Given the characteristics of mortgages, HelpMyCash only recommends these products to finance sustainable reforms that cost large sums of money. For example, to completely rehabilitate the facade of a house, to install thermal or photovoltaic plates...

A personal loan, on the other hand, allows you to get smaller amounts of money. Its amount usually ranges between 1,000 and 50,000 euros, although some entities can lend up to 100,000 euros to finance reforms that improve the sustainability of a home, but this is not normal.

The main disadvantage of this product is that it is more expensive than a mortgage. In the first place, because their interest is significantly higher: around 7% on average. Secondly, because its repayment term is much shorter (about ten years at most), which forces the debtor to pay higher monthly installments.

Even so, there are financial companies that grant loans with an interest much lower than the average. The Cofidis Personal Loan, for example, has a rate from 4.95% and does not include opening or study commissions. It allows obtaining between 6,000 and 60,000 euros to be repaid within a maximum period of ten years.

According to HelpMyCash, hiring a personal loan to finance a reform is advisable if the money is needed to carry out a low-cost or urgent work, such as installing double-glazed windows, changing the boiler for a more efficient one, etc.

There is also an alternative for people who already have a mortgage on the home they intend to renovate: increase their capital. In this way, the amount of money needed to improve the energy efficiency of the house or apartment can be obtained, provided that the total amount of the mortgage does not exceed 80% of the value of the property.

Of course, to increase the capital of the mortgage it is necessary to reach an agreement with the bank, which can demand consideration in exchange for approving the modification. For example, you can ask for the interest on the mortgage loan to be increased. In these cases, the client will have to assess whether it is worth accepting these new conditions or whether it is more worth keeping their mortgage as it is and financing the reform with a personal loan.



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