Yes, you can. I will tell you how it works in Polish banks. Even if you are buying an apartment on loan, you still need to have your own savings to finance down payment and other initial expenses related to the purchase of the apartment. I write about it in this post: Buying a flat on a mortgage – let’s calculate initial expenses.
What about the costs of finishing or renovation? You can pay for it with a mortgage loan.
We talk about finishing the apartment when you buy a new flat from a developer. When you buy a resale flat from the secondary market and you want to “refurbish” it, we will talk about renovation. In this post I will refer to “apartment finishing” in case of purchasing a new flat from a developer, but most of this will apply to renovation as well.
Interior designing and arranging furniture in a new flat might be great fun. But it is also a time when you have enough on your mind because you have to plan everything, buy materials, choose a company that will do the work. And you have to manage all of this while leading your normal life – going to work and doing everything else. If you’re financing your investment with a mortgage loan, dealing with a bank is time-consuming as well.
I hope that once you have read this post, you will have a better understanding of the issue and you will avoid falling into traps when negotiating with a bank, which will save you a lot of hassle.
What can I finance as a finishig works?
To put it simply – everything which is a permanent feature of the apartment. In other words, what you can’t move out of the apartment 🙂
In most cases it will be
All standard finishing work, such as:
- dry walls
- plasterwork, painting
- modifications to installations
- tiles, terracotta
- other: e. g. stairs if the apartment is two-storey
- kitchen appliances
Wait a moment … and what about other furniture, TV…., PLAYSTATION : -) ? I’m sorry but that won’t do. After all, you can “take these things out of you house” and for that reason you won’t be allowed to finance them with a mortgage loan. Well, unless you use a magic trick that I will reveal you later 😉
How much can I borrow for finishing works?
Everyone has different needs and expects a different living standard. However, it is said that there is no limit to the money people can spend on finishing and decoration. It is doable to finish an apartment for 40k, but it won’t be a problem to spend 100k on the same condo.
Does this mean that if I’m going to buy a 40 square metre apartment for 260k, I can take, let’s say, 100k credit for finishing? Nope, you can’t.
LTV is the key
To take out a mortgage loan in Poland today, you must have 10% of your own contribution. This means that the LTV ratio cannot exceed 90%.
What the heck is LTV ratio?
This means that if the value of the property is 300k, a bank that requires 10% of the down payment will grant you a maximum of 270k loan. No more! Even a single grosz! (you know what ‘grosz’ is, right? 😉 )
And it is precisely this ‘value‘ that is crucial here. In general, the bank defines the’ value‘ of the property in such a way that it takes the lower of the two values:
- the future market value (i. e. after finishing in our case) OR
- transactional value (i. e. purchase price) + total expenditure on finishing (from your cost estimate)
If you buy a 40-metre flat for 260k and you apply for additional 100k for finishing, the bank won’t assume the value of 360k (260k + 100k) because the future value will be lower! Why?
100k spent on the finishing of a 40m apartment in a block of flats will not increase its market value by 100k. ‘Market value’ means the selling price and it will be very difficult to sell such a flat for 360k in the short term. The bank is interested merely in the so-called quick-sale value.
So what is the exact future value estimated by the bank?
In general, 1k per metre can be taken as a benchmark. So if you apply for additional 40k to finish a 40 m apartment for 260k, then you can expect the assumed value at the level of 300k, that is 260k + 40k = 300k. You will then be able to finance 90% of your investment with a mortgage loan, i. e.
- 300k ‘value’ x 90% = 270k – this is the maximum you can get from the bank, 30k – this will be your down payment.
Remember that this 1k per m2 adopted above is only an approximate value. Theoretically, it is possible that the bank will assume less, i. e. in our example it will set the value of 290k instead of 300k. The bank will then offer you a loan of 261k (290k’ value’ x 90%), and the rest 9k you will have to get somewhere else, or reduce your finishing expenses (give Playstiation a miss 🙂 ).
That is why I apply to 3 banks at the same time with my clients. One bank will estimate the value of your flat (from the example above) at 290k, the other at 300k and the third at 310k. If the client doesn’t have spare 9k to contribute, the bank which has estimated the value at 290k “will go out of play” but we still have two banks to choose from!
How does it work?
The loan application must be accompanied by a one-page cost estimate for renovation/finishing works.
If you happen to fill in such a form in order to apply for a mortgage loan, it will be more likely available only in the Polish language version 😉 but don’t worry, we’ll make it 🙂
Who to hire to do the finishing works?
The bank don’t care who is to perform the finishing works included in the estimate or what methods and technologies you are suppose to implement.
There are 3 options:
- you will find a company that specializes in finishing works
- you will engage your developer (sometimes developers offer finishing works too)
- Do-It-Yourself – available for only a few.
Bank will require some proofs
The loan agreement will set a deadline for the completion of finishing the apartment (e. g. 6 months after the loan has been disbursed). By this date you will have to confirm that you have finalized all the finishing works as provided in the cost estimate. How? By taking pictures of your newly finished apartment. There are banks that are satisfied with your own pictures. It is enough to send them via email. But it may be the case that your bank will send their representative who will take the photos on site (and you will pay for it).
And that’s it? Photos are enough?
Yes, in most cases photos are a suffcient proof that you have completed the works outlined in the cost estimate. The bank wants to confirm that you have finished your apartment according to the agreement because it is a loan security. By approving your application, the bank took it into account that it would secure itself in a finished flat (which has a higher value than a property under development).
That’s why the bank only needs pictures and if you have agreed with the bank on 50k in the credit agreement but eventually you managed to do all the work for 45k, then you can spend these 5k, for example, on furniture.
That is the trick I promised you 🙂 Sometimes may work.
When could your bank possibly want to see invoices?
I’ve recently had a client who bought a two-storey apartment in Wroclaw. He applied for 75k for finishing the apartment. Bank stated in the agreement that part of the loan intended for the finishing works will be disbursed in two tranches (which may sometimes be the case). Before the bank paid the client the second tranche, it had sent his employee to take pictures.
After a week, it turned out that the bank did not want to release the second tranche because, judging from the photos, the client did not complete all the works agreed upon. And that’s how it really was! He paid down 10k for the kitchen and another 5k for the stairs – it was not visible in the pictures, as it was an advance payment but he indeed spent the money according to the cost estimate. In this situation, it was enough for him to show the invoices and confirmations of the transfers he made and the bank released the second tranche of the loan.
Sometimes invoices may prove useful, but in most cases photos should be enough.
Estimate the expenses accurately
A scenario that you don’t spend all the money from the budget you have forecast in the cost estimate doesn’t seem to occur in nature. I can’t remember a single client who had such a “problem”. But I can easily recall a few who were lacking funds at the finish line.
Therefore, plan your expenses carefully (I recommend using Excel) and add a buffer for unexpected costs.
If you exceed the deadline, the bank will send you a series of reminders (for which it will charge you), and in the last resort it can even terminate your contract (no worries, it is not likely to do so if you exceed the deadline by one month). You can also ask the bank to reschedule the deadlines.
How to make a realistic estimate of the finishing costs?
Hm, that’s a tricky question. Let’s say you don’t need a golden toilet. But you also want to have a decent standard (not necessarily use cheapest materials). And of course, you don’t have time to do some works by yourself (who does?). And you are buying a flat in one of the biggest cities – Wroclaw, Warsaw, Krakow, etc. Hm, so let’s say that 1k per square meter might be the benchmark price. And don’t expect anything fancy from spending 50k for finishing 50 – square meter apartment. But actually, we don’t really need it to be in this way. It’s only a flat, right?
Uff, that’s it. I always try to write as simply and quickly as possible, but in the end the text is twice as long as I initially thought 🙂 This is because I always want to cover up the topic.
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Stay tuned for the next time!
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