Financing reforms is one of the most common purposes since the confinement due to the pandemic in Spain ended. In fact, according to Here your Reform, requests for budgets for reforms have increased by 56% in 2020 with a budget to finance comprehensive reforms of 25,300 euros on average. But, how is it cheaper to finance a reform? There are two alternatives to do it, either extend the mortgage or apply for a reform loan, we explain which is the best option.
Reform loan versus mortgage expansion
It is one of the main issues since mortgage interest is much lower than that of consumer loans, 1.92% APR compared to 8.01% APR, respectively, according to the Bank of Spain.
However, the costs of increasing the capital of the PHH mortgage are also high and must be paid before having the capital increase. These costs will be the commission for novation, half of the notary, registration, agency, and appraisal (if requested by the bank).
Practical example: a saving of 2,000 euros
To see it more clearly, imagine that we want to carry out a reform worth 25,000 euros to be repaid in 10 years. To finance it, we can opt for a capital increase of a fixed mortgage at 2.5% in force, of which we have 150,000 euros to pay, or request a consumer loan at 8%.
With the mortgage, we must have the costs of the extension:
- Novation expenses 750 euros
- Notary 275 euros
- Registration 275 euros
- Agency 250 euros
- Appraisal 300 euros
A total of 1,850 euros that we must advance before starting the reform. Taking this into account, with the 2.5% fixed mortgage to repay 25,000 e in five years, 1,621 euros in interest would be generated, which would add up to a total of 3,471 euros to finance the reform with our mortgage.
With a consumer loan with an interest of 8% without concession fees or links, a financing reform of 25,000 euros to be repaid in five years would generate 5,414 euros in interest.
The savings of an extension compared to a loan is 1,943 euros.
The advantage of going to the extension is that less interest will be generated than with a consumer loan. However, we will have to make a provision of funds to pay the novation expenses, something that will not happen with reform loans.
When is a personal loan for reform better?
There are some situations in which going to a consumer loan will be more advantageous than going to an extension of the mortgage loan.
On the one hand, if we have been paying the mortgage for a short time, the outstanding capital will be greater and the commissions that are with a commission on the money that we have left to pay will raise the price a lot. Thus, a personal loan could be a cheaper alternative.
On the other hand, a consumer loan will also be better when the reform does not require a large investment since the savings that we could achieve would be very small compared to the steps that must be carried out for the expansion.
For example, for a loan of 10,000 euros to be repaid in 3 years at 8%, the interest generated would be 1,281 euros, while the cost of the mortgage extension alone (using the previous example) would already be 1,850 euros.
Likewise, these situations or the savings we obtain will depend on the supply of consumer loans that we find, the outstanding capital that we have left to pay for the mortgage, or if it has a higher cost.
In any case, it is always important to carry out simulations according to our particular situation to know if our savings allow us to provide funds or if the savings we will obtain are worth the more complex management of the increase.