Renovation loan: definition and financing renovation work

• Renovation loan: a practical definition for Switzerland
• The three main ways to finance renovation work
• What the bank assesses before granting financing
• Worked example: how much can you actually borrow?
• Renovation costs, property value and pitfalls to avoid
• Frequently asked questions about renovation loans

A renovation loan is financing used to pay for work on an existing property: interior renovation, roofing, heating, insulation, windows, extensions, alterations or energy-efficiency improvements. In Switzerland, however, the term does not refer to one single banking product. Depending on the scale of the work, the property value and your existing mortgage, the financing may take the form of a mortgage increase, a construction loan with staged drawdowns or a specific renovation mortgage.

This distinction matters. A homeowner replacing a kitchen for CHF 35’000 does not necessarily need the same financing structure as someone carrying out a CHF 300’000 full-house conversion. The bank looks not only at the cost of the work but also at the existing debt, the property value before and after renovation, the household’s affordability and how the funds will be used.

Renovation loan: a practical definition for Switzerland

In Swiss practice, “renovation loan” is therefore mainly a functional term: it describes the purpose of the financing, not necessarily its legal or banking structure. Two homeowners carrying out exactly the same work may receive different financing structures depending on their circumstances.

The Swiss Federal Office of Energy notes that alterations to a home can, among other options, be financed through an increase in the existing mortgage or by setting up a construction loan. Some banks also market mortgages or loans specifically for renovation, particularly where the work improves the building’s energy performance.

A renovation loan should therefore not be confused with a construction loan. A construction loan follows a specific mechanism: funds are made available through an account linked to the building project, drawn progressively as invoices fall due, and generally consolidated into a mortgage afterwards. For a simpler renovation, a direct mortgage increase may be more suitable.

The three main ways to finance renovation work

1. Increase the existing mortgage

For work on a property that is already financed, increasing the mortgage may be the simplest solution. The bank reassesses the situation: property value, current debt, cost of the work and affordability. If the loan-to-value ratio remains acceptable and your income can support the additional debt, a new mortgage tranche may finance some or all of the renovation.

This approach is particularly logical when the existing debt is already relatively low compared with the property value. A homeowner who has amortised the mortgage over several years may have significant additional financing capacity without having to sell other assets.

2. Use a construction or renovation loan with staged drawdowns

For a major conversion, an extension or a project involving numerous progress payments, the bank may prefer a construction loan. Invoices are then paid progressively and interest generally applies only to the amounts actually drawn. At the end of the project, the loan is consolidated into a long-term mortgage.

This structure provides greater control over a major project, but it usually requires more documentation: quotations, plans, invoices, a works schedule and sometimes approval of payments by the architect or construction manager.

3. Use a renovation mortgage or a dedicated energy-efficiency product

Some banks offer products specifically designed for renovation. These may take the form of an additional fixed-rate or SARON mortgage, sometimes with preferential conditions for energy-efficiency work. Criteria vary by lender: minimum or maximum amount, type of property, proportion of energy-related work, certifications or supporting documents required.

These products do not replace the usual mortgage assessment. Even where a promotional rate is offered, the lender still checks that the overall property financing remains acceptable.

What the bank assesses before granting financing

The amount shown on your quotations is not automatically the amount the bank will finance. The lender first examines the property’s mortgage lending value and the level of the existing mortgage.

The calculation can be summarised using a simple logic: potential mortgage headroom = maximum amount accepted on the bank’s property value – existing mortgage debt. This result remains theoretical, however: affordability must then support the additional debt.

The bank will generally assess the following:

• the detailed cost of the work and the available quotations;
• the current property value and, for major renovations, its likely value after the work;
• the amount of the existing mortgage and the new loan-to-value ratio after financing;
• affordability, recalculated with the additional debt;
• the nature of the work: value preservation, improvement, structural alteration or energy renovation;
• how the funds will be paid out: in one payment, in tranches or against invoices.

Affordability is often the point that surprises homeowners. A property may provide sufficient value as security, yet the bank can still refuse an increase if the household income does not support the theoretical costs of the total debt.

Worked example: how much can you actually borrow?

Consider a homeowner whose house is currently valued by the bank at CHF 900’000. The remaining mortgage is CHF 600’000 and the planned renovation costs CHF 180’000.

After assessing the project, the bank estimates that the house could be worth CHF 1’000’000 once the work is completed. If, for example, it accepts a maximum loan-to-value ratio of 80%, the total mortgage debt could theoretically reach CHF 800’000.

The theoretical financing headroom would therefore be: CHF 800’000 – CHF 600’000 = CHF 200’000. The CHF 180’000 renovation could therefore, in principle, fit within this amount.

Now suppose the bank believes that the CHF 180’000 of work will increase the property value only to CHF 940’000. At 80%, the theoretical total financing falls to CHF 752’000. With existing debt of CHF 600’000, the remaining headroom is only CHF 152’000. At least CHF 28’000 would therefore need to be financed in another way, before allowing for any contingency reserve or cost overruns.

This example illustrates an essential point: CHF 1 of renovation spending does not automatically create CHF 1 of additional bank value. A high-end kitchen, swimming pool or expensive finishes may cost substantially more than the increase in value recognised by the lender.

Renovation costs, property value and pitfalls to avoid

Do not confuse the cost of the work with the value after renovation

The bank finances property security, not simply a list of invoices. Necessary renovation — for example roofing, heating or insulation — may preserve the building’s value without creating an equivalent increase in market value. Conversely, alterations that genuinely improve living space, functionality or energy performance may receive greater recognition in the valuation.

Obtain detailed quotations before applying for financing

An application supported by two or three precise quotations is much easier to finance than a project described simply as “about CHF 150’000 of work”. For a major renovation, also allow for a contingency reserve: discovering damp, outdated electrical installations or a change in requirements during the project can quickly increase the budget.

Energy renovation: include grants before fixing the borrowing requirement

For an energy renovation, the financing requirement should not be calculated solely from the gross amount of the quotations. Some measures may qualify for cantonal or federal grants. See our guide to energy renovation and apply for support before work begins where the relevant programme requires this.

How grants are treated in the financing plan varies by lender. Some banks take them into account in their assessment when they are sufficiently documented; others require the homeowner to advance part of the financing first.

A renovation may trigger a complete reassessment of the application

Increasing a mortgage is not simply a matter of adding another tranche to the existing contract. The bank may reassess your income, debts, age, affordability, loan-to-value ratio and property value. A situation that was comfortable when the property was purchased may be assessed differently several years later.

Before signing significant quotations, ask the lender for an initial financing indication based on the actual project rather than only on the current value of your home.

Frequently asked questions about renovation loans

In summary, the right first question is not “what is the interest rate on a renovation loan?”, but rather to determine which financing structure suits the project, what value the bank will recognise after the work and how much additional debt your household can afford.

For a specific project, you can submit your renovation project to us so that we can compare financing options based on your current mortgage, renovation budget and property value.

Disclaimer: this article presents the general principles of renovation financing in Switzerland. Loan-to-value, affordability, post-renovation valuation, drawdown and grant criteria vary by lender, canton and project. Have your financing validated before entering into significant commitments with contractors.